Earlier this year, the government announced the introduction of a new tax efficient saving account, the Lifetime ISA (LISA). These accounts will be available from April 2017. This blog gives a brief overview of LISA’s, comparing them to personal pension schemes.

LISA – A Brief Overview:

The aim of a LISA is to help young people save flexibly for the long-term. It is an addition to the expanding ISA family and operates in a similar vein to these other products.

So how do LISA accounts compare to personal pensions?

1.Age Limits:

Personal Pension: You can start contributing to a personal pension from age 16 up to age 75. Further contributions can be made, but they will not attract tax relief.

LISA: You can open a LISA Account if you are aged between 18 and 40. There is no cut-off age for making contributions, but you cease to receive the government bonus when you reach 50.

2.Contributions Attaining Tax Relief:

Personal Pension: UK residents get tax relief on contributions at the higher of:

1. £3,600 and
2. 100% of relevant UK earnings up to the annual allowance (£40,000 from 6 April 2016).

The government tops up your qualifying pension contribution by 25%. Furthermore, if you are a higher rate, or additional rate taxpayer, you get an additional benefit. This is because the tax bands are increased by the gross contribution, meaning that more of your income is taxed at the lower rate.

LISA: The maximum annual amount that you can save is £4,000. Any savings invested before your 50th birthday will receive an added 25% bonus from the government. This means you can receive a maximum extra amount of £1,000 annually. In contrast to pension contributions, there is no earnings requirement on this amount.

Note however, that any contributions made into a LISA will be part of the overall ISA contribution limit (£20,000 from April 2017).

3.Making Withdrawals:

Personal Pension: Generally, you can’t take money out of a personal pension until you reach 55. At this time, you can take only 25% of the value of your pension fund tax free. The remainder is taxed as income.

LISA: After the age of 60, all your savings accumulated in a LISA can be taken tax-free. Alternatively, funds can remain invested and any interest and investment growth will be tax free.

You can also withdraw money before age 60, but you will lose the government bonus (including any interest growth) and will suffer a 5% charge.

4.Other Uses:

Personal Pension: Has the sole function of enabling you to save towards retirement.

LISA: As well as being a way to save for retirement, the fund could also help first time buyers onto the property ladder. Provided the account has been held for a minimum of 12 months, up to 100% of savings accumulated in a LISA can be used as a deposit on a first home in the UK worth up to £450,000.

Conclusion:

There is no need to make a choice between the two as LISA’s and pensions can be held and contributed to in tandem.

LISA’s will be of greatest benefit to you if you are under 50, and do not have UK relevant earnings. This is because you can contribute an additional £400 annually, compared to a personal pension. This equates to an additional annual bonus of £100.

Higher rate and additional rate tax payers will continue to get most benefit from investing in a personal pension scheme due to the additional tax relief gained through self-assessment.

References:

• Tax on your private pension contributions – https://www.gov.uk/tax-on-your-private-pension/overview
• Tax Relief on Member’s Contributions – http://www.pruadviser.co.uk/content/knowledge/technical-centre/tax_relief_members_contributions

Tagged