Lifetime ISA – the devil is in the detail
The new Lifetime ISA may be bad news for the current pension regime with a 24% sting in the tail for savers, says Lowes Financial Management managing director Ian Lowes
There has been enough mooted over the recent past concerning changes to, or abolition of tax relief on pension contributions, the proposal of the ‘Pension ISA’ and the removal of the of tax free status of pension commencement sums, to lead me to conclude that the new Lifetime ISA is the culmination of all of these proposals and likely to become the retirement savings vehicle of the future.
A non home-owning, basic rate taxpayer in their 20s today is highly likely to opt for the Lifetime ISA over a personal pension and that makes perfect sense. However, I think it would be short-sighted to expect that they will change savings vehicle to a current style personal pension when they are in their forties, as I speculate that the current pension regime will be as good as abolished by then in favour of an evolved Lifetime ISA.
Opting for ISAs over pensions has been the default choice for the younger generation given that the former can be accessed long before retirement, perhaps to fund property purchase. The Lifetime ISA will now make this choice a no-brainer, at least for aspiring property buyers.
Those looking at buying a house in the next couple of years, should already be contributing to a Help to Buy ISA and will be amongst the first to be investing in a Lifetime ISA, but with a £4,000 annual contribution limit, it has to be accepted that the bonus one year’s contribution will, at best cover the house purchase legal fees.
That said, it’s important to note that with the last of the auto-enrolment staging dates following shortly after the introduction of the Lifetime ISA and many schemes already in force, pension savings for the younger generation generation will still be an expected norm over and above and Lifetime ISA contributions. It will be an unfortunate consequence if those in their twenties and thirties choose to opt out of the employer’s funded pension scheme in favour of contributing to a Lifetime ISA. Indeed, on paper this will not be advisable.
It is important to appreciate, however, that the Lifetime ISA is to be used for purchase of a first main residence or, to fund retirement after attaining age 60. If the funds are withdrawn before age 60 for any purpose other than purchasing a first property the penalty will be severe. Withdrawal will result in the loss of the government bonus and any interest or investment growth on this, plus a 5% charge. This ultimately translates to a 24% reduction in the savings fund putting the investor in a worse position than if they had used a standard ISA.
For those in their 50’s or 60’s, the boost in the ISA allowance to £20,000 from next year could also serve to take pension saving off their radar however, at that age bracket a pension is a more attractive vehicle than an ISA particularly for higher rate tax payers and those with a potential Inheritance Tax liability.