The financial press has been awash with articles about the mysterious ‘LISA’ ever since George Osborne delivered his Budget a couple of weeks ago.
There are however mounting fears though that ‘LISA’, otherwise known as the significantly less catchy Lifetime Individual Savings Account, could seduce some people, only to leave them worse off in retirement.
Who, or what, is LISA?
LISA or the Lifetime ISA, is the brainchild of George Osborne and will allow anyone aged 40 or under to save for a deposit on their first home or retirement at the same time.
Available from 6th April 2017, for every £4 saved the Government will add an extra £1, with the money, which can be invested in the same way as a Cash ISA or Stocks & Shares ISA, then put towards the deposit on your first home or retirement.
There are catches though:
- The maximum value of a home which can be bought using the proceeds of a LISA is £450,000, which for most first time buyers won’t be a problem
- The Government bonus won’t be paid on contributions after the age of 50
- For those using a LISA to meet the cost of retirement, the accumulated ‘pot’ isn’t available until the age of 60, without penalty
- If any money is withdrawn before the age of 60, and not put towards a house deposit, the Government bonus will have to be repaid, plus the growth thereon. A 5% penalty will be payable
Don’t be seduced
The word ‘pension’ rarely fills anyone with excitement, and for many people, particularly younger generations, pensions are positively toxic.
However, we are concerned that many employees will chose to save for retirement using a LISA and not a pension, potentially leaving themselves significantly worse off in retirement.
Millions of workers have already been automatically enrolled into a workplace pension over the past few years. Furthermore, as the roll out starts to affect smaller employers, all workers will soon become members of a workplace pension.
Although workers are automatically enrolled, it is possible to opt out. Over the past few years opt-out rates have been surprisingly low. However, we are concerned that when LISA is launched employees will prefer this option to a workplace pension, leaving themselves worse off in retirement, because they will have missed out on a valuable employer contribution.
LISA v Automatic Enrolment
If you are saving for retirement, Automatic Enrolment is actually more favourable to you than using a LISA.
Top up: The value of tax-relief on a pension is the same as the Government bonus on a LISA. However, with a LISA the Government top up ceases to be paid at age 50, this is not the case with pensions, where tax-relief is available irrespective of age
Furthermore, the Government top up to a LISA is capped at £1,000 per year, this is not the case with a pension.
Access: You can currently access your pension from the age of 55, whether that’s a good idea or not is a debate for another day!
It is rising though, from 2028 the earliest you will be able to get access to your private or workplace pension is 10 years before your State Pension age.
With a LISA, the earliest you can access the pot of money without penalty (assuming you don’t use it to help buy your first house) is 60. Take money out earlier and you will lose the Government bonus, the growth on the bonus and pay a 5% penalty.
Employer contribution: By choosing a LISA instead of a workplace pension you will lose out on valuable contributions from your employer.
That’s effectively giving away from money, which most of us can’t afford to do.
When is LISA a good idea?
If you are saving for the deposit on your first home and you are young enough to qualify, why wouldn’t you use a LISA? For every £4 the Government will add £1; as a well-known supermarket says, “every little helps!”
However, if your aim is to save for retirement, don’t be seduced by LISA’s charms, your workplace pension, into which your employer pays will probably give you a bigger pot when you reach retirement.
For the time being, you will just have to put up with it being called a ‘pension’!
Remember too, if you plan to use the money in your LISA towards the deposit on your first home, but decide not to buy, you will lose the Government bonus and pay a penalty if you withdraw the money before you reach 60.
We are here to help
If you would like know more about Lifetime ISAs or planning for your retirement, we are here to help.
Call Sarah or Bev today on 0115 933 8433 or email email@example.com