The new Lifetime ISA (which is the LISA I am referring to here) was introduced in the 2016 Budget and is not to be seen as the death of pensions as many people have announced.
Firstly, some facts about LISA:
- Any UK individual aged 18 to 40 can open one from April 2017
- The maximum contribution to LISA is £4,000 per annum, and the Government bonus will top this up by a maximum of £1,000, although the bonus will only be added until the age of 50
- This £5,000 LISA amount is not subject to pension allowances , it is on top of the pension limits
- Contributions into LISA will utilise part of the individual’s ISA allowance each year, although this is due to increase to £20,000 from April 2017
- The underlying investment in LISA will grow tax free
- The fund built up in a LISA can be accessed from age 60 with no penalty, or on purchase of a first home (subject to other restrictions)
- Access to the funds at other times comes with a reclaim of the Government bonus, the growth on that bonus, and a 5 per cent further penalty
- On death, the full LISA value can be inherited tax free by spouse/civil partner.
So, LISA sounds pretty fantastic, but why this isn’t the death of pensions?
- Any UK individual from birth can have a pension, they must be between 18 and 40 for a LISA
- Pensions give tax relief at the highest marginal rate of the individual (i.e. 20 per cent, 40 per cent or 45 per cent), whereas the Government bonus is a set amount starting at the equivalent basic rate for pensions
- Pension tax relief is claimable up to age 75, the Government bonus is only claimable up to age 50
- An individual can pay a maximum contribution of between £3,600 and £40,000 gross into a pension each tax year (including the tax relief); whereas LISA is only £5,000
- Your employer cannot pay into your LISA so, for now at least, workplace pensions (as opposed to workplace LISAs) will still be around
- National Insurance Contributions cannot be redirected to your LISA either, but they can if your employer offers Salary Exchange with their pension
- The lifetime allowance on pensions is £1 million, which is a lot more than the majority of the UK working population will achieve.
In our opinion, whilst LISA does not signal the end of pensions, she could carve a good niche for herself as another planning tool for individuals, namely:
- Those who have made the maximum tax relievable pension contribution
- Those saving for their first home
- Those who are likely to exceed the pensions lifetime allowance
- Non-taxpayers who don’t qualify for other tax reliefs due to no, or very little, earnings
- Non-earning spouses who have already utilised the £3,600 gross into pensions.
Whilst there are still some details that need to be confirmed before they become widely available next tax year, I am sure you will agree that LISA could become a household name.