Lisa – sweet girl next door or the pensions assassin?
The recently launched Lifetime ISA (Lisa) is designed to help under 40s purchase their first home or save for retirement. While we welcome anything that’s good news for savers, we have one reservation; might young Lisa be a nail in the pensions coffin?
There’s already confusion over the account’s purpose – is it for first-time-buyers or those wishing to save for retirement? Surely such contrasting savings aims require different investment strategies?
Many providers have yet to commit to offering a Lisa, frustrated at the last-minute final detail from the authorities. But for savers considering a Lisa, do they know the differences between what’s on offer and their workplace pension scheme?
ISAs are widely recognised as a great place for tax-free savings. The individual tax-free limit is £20,000 a year and this can be split between cash and stocks & shares ISAs. A Lisa can be cash or stocks & shares based and for every £4 saved, the Government will add £1 (worth up to £1,000 a year).
The first bonus is payable at the end of the 2017/2018 tax year and after this it will be paid monthly, up until the saver is 50. A maximum of £4,000 a year savings are eligible for the 25% top-up and in order to receive this, funds must be used for a house purchase or held until the saver is 60. If they’re used for anything else, there’s a 25% exit penalty, which not only loses the bonus, but it could reduce the overall savings amount too.
Employees aged between 22 and the State pension age, earning over £10,000 a year, must be automatically enrolled into a workplace scheme (workers earning less than this can also opt in, as can those aged 16 to 74).
Employers also have an obligation to make pension payments, contributing a percentage of qualifying earnings. Tax and National Insurance (NI) relief on contributions means money paid into an employee’s pension goes much further than it would if it was channelled into a salary. The result is a triple top-up of an employer contribution, tax relief and NI relief, courtesy of the employer and Treasury.
Only savings of £4,000 a year are eligible for the Lisa top-up, whereas the pension top-up limit is £40,000 for most people. Although the 25% Lisa bonus is equivalent to pension tax relief of 20% for basic rate taxpayers, it is only half what higher rate tax payers – who receive 40% tax relief on their pension contributions – can achieve.
And this is before employer contributions are taken into account. While money in a Lisa can be withdrawn tax-free at any time, bonuses will only be paid at age 60, (or on the purchase of a property). With pensions, 25% of the pot can be taken, tax-free, from age 55 onwards with the rest as taxed income.
Addition not replacement
Lisas are great and pensions are great, so why are we worried? Because several first-time buyers we’ve spoken to are desperate to get out of rented accommodation and onto the property ladder. Retirement seems such a long way off that they would rather channel anything they can save into a deposit for a house and a LISA can help with that whereas a pension can’t.
This isn’t wise of course, workers who opt out of their company pension will not only lose their employer contributions, but they’ll lose the tax benefits too. As former pension minister Baroness Ros Altman said: “Opt out of a workplace pension and you lose the chance to double your money.”
But as house prices rise higher, lovely fresh Lisa is going to seem a lot more attractive to many than boring old pensions. If there is a significant shift in people stopping pensions to save into Lisas it will aid the Government policymakers who want to see the end of tax relief on pensions (which would also save the Government a fortune if it happened). She seemed such a nice girl too!
This article was provided by Lemonade Reward.
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