Since it's introduction in April 2017, the Lifetime ISA (LISA) has very quickly become a favourable product for retail investors, especially those who plan to use is as part of the deposit for their first home. But the LISA comes with an additional feature in that you can save and invest within this account as an alternative or as an addition to a personal pension (SIPPs or Workplace pension). In this guide we compare the pros and cons of the lifetime ISA and a personal pension so that you can make an informed decision as to which one best suits your objectives.
A Lifetime ISA allows you to save up to £4,000 every tax year of which the government will top you up with an additional bonus of 25%, thus adding a maximum of an addtional £1,000 per tax year. Your savings can either be used as part of a deposit for your first come and/or used as a pension. For the purpose of this guide we will be focussing on pension element of the account rather than it's first time buyers benefits.
If you decided to use this account as a pension alternative, you can save and deposit the £4,000 and obtain the 25% for today up to the age of 50, of which then you cannot make any new contributions or obtain the bonus, however you can keep your funds invested and then pull out everything tax free at the age of 60. You have to be the ages of 18 and 39 to open one of these accounts.
Lastly if you decide to withdraw your funds prematurely, you will usually be charged a 25% penalty, however this has been reduced to a temporary 20% due to the current pandemic.
So immediately you can see the pros and cons of the LISA
Tax efficient, investments can grow tax free
You can take everything out tax free age 60
25% bonus added to your deposits
Age restriction - 18 to 39 to open the account
No bonus after age 50
Have to wait until age 60 before you can withdraw funds
Workplace Pensions & SIPPs
As long as you are a UK resident and employed, then it is compulsory for your employer to enrol you unto a pension program as long as you’re between the age bracket of 22 and the current state pension age and you earn at least £10,000 per annum. The total that goes into a pension (depending on what type of scheme it is) is usually 8% on the defined contribution scheme. This is split 5% from your salary and an additional minimum of 3% contribution from your employer.
You can contribute more than the 8%, and the maximum you can put in is equal to your overall salary, up to £40,000 of which there is no tax at source. With pension account you cannot touch the funds in the account until the age of 57 (unless your are 55 by 2028 which then you can take it at 55) of which then you have the choice of taking our 25% tax free, and looking at other options such as 'drawdown' with the remaining 75%.
SIPP stands for self-invested personal pension and has the same characteristics of standard pension. The main different is that individuals take this route if they want to manage their own pensions. Many organisations also provide the facility of paying your work place pension into a SIPP so that you can manage it yourself if you choose to.
Funds are not taxed at source and grow tax free
Maximum is subject to salary up to £40k per annum
Free money from employment with workplace pensions if you don't opt out
Can have some access to a pension approx 10 years before the standard state pension age
Full lifetime allowance of £1,073,100 (as of 2020/21)
You can continue to pay into pension as long as you stay within the limit
You can only take out 25% Tax free at age 57, the rest is usually taxed at your personal tax band
Lifetime ISA or Personal Pension
Please discuss with a tax advisor who may know more about your personal situation in order to provide you with the best, most suitable advise.
Choose the Lifetime ISA if:
You plan on putting no more that £4,000 towards retirement planning and are happy to wait to 60 in order to take everything out tax free
You are a lower rate tax payer, this doesn't make much difference, but you will mathematically benefit more from a pension if you are a higher rate tax payer. This is because your pay no tax on the pensions and this is equivalent to actually receiving a bonus. A 25% bonus works out to be a 20% tax saving.
Choose the Personal Pension if:
You are a higher rate tax payer or additional rate tax payer
You are an employee ( get that extra 3% free money)
You have a lot of cash to contribute, as there is much more of an allowance with personal pensions than there are with Lifetime ISAs
Plot twist: You can have both.