Will You Need a Lifetime ISA?

The Lifetime ISA is due to launch on 6 April 2017.  It is a new savings product for those aged 18 to 40.  Those who are eligible may be wondering if they should apply.

This will depend to a great extent on what the money is intended to be used for in the future.  Money saved in a Lifetime ISA can only be used to purchase a first home or from the age of 60.  Although it’s possible to access the money in the meantime, significant penalties apply.  Therefore, a Lifetime ISA is only designed for those who are saving either to buy a first home or for the very long term.

For long term savings the natural point of comparison is with pensions, and in particular personal pensions.  The Lifetime ISA could not be considered an alternative to membership of a pension scheme like the NHS Pension, where the employer contributes and a certain level of income is guaranteed in retirement.

Those wishing to make retirement savings outside of the NHS Pension will need to weigh up the value of tax relief on personal pension contributions and the government bonus added to the Lifetime ISA.  These are summarised in the table below.

 

Lifetime ISA

Personal Pension

Amount added by the Government

25%

20%, with higher and additional rate taxpayers able to claim an additional 20% and 25% respectively through their tax returns

Annual contribution limit

£4,000

£40,000, reducing incrementally to £10,000 if income over £150,000

Age at which contributions stop attracting bonus/tax relief

50

N/A

Tax treatment of withdrawals in retirement

Tax-free

25% tax-free, rest subject to income tax

In reality, however, there is no restriction on having both – for example a personal pension could be funded up to the Annual Allowance (bearing in mind how much of the allowance has already been used by the NHS Pension and any other pension contributions) and then £4,000 directed to the Lifetime ISA.

Another point to note is that although a Lifetime ISA can only be opened until age 40, once open contributions attracting the government bonus can be made until age 50.  Therefore anyone approaching age 40 may want to open a Lifetime ISA so that the option of contributing is still available for the next ten years.

Please note that the value of any tax benefits depends on your own circumstances and tax rules are subject to change by the government.  For personal advice on the suitability of savings and pension products please contact Richard Higgs, Chartered Financial Planner, on 0117 966 5699 or at richard.higgs@wealthwestmedical.co.uk. 

 

 

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