Following on from my last blog where I talked about alternatives to pensions. In this blog I will talk about a more recent pension alternative the Lifetime Individual Savings Account (LISA). This has been introduced by the government to cover two things that they were worried about. Firstly the government introduced it to try to encourage individuals to save more for their retirement. Secondly the government wanted to help individuals to save for the first home.
LISAs have some eligibility criteria which may rule it out directly for most of the readers of this article however it may be worth encouraging younger family members to use it. Firstly you can only open one before your 40th birthday so if you are or know someone coming up to their 40th birthday it could be worth opening one now and putting some money in so that you can use it in the future. To receive the additional tax benefits you either need to be using it for retirement purposes which is considered withdrawals any time after age 60 or for the purchase of your first home.
So what are the tax benefits for investing in an LISA. If the withdrawals are for retirement or for a house purchase then withdrawals are tax free. As with an NISA there is no tax to pay on any growth.
There are a couple of other important differences you are limited to £4,000 per annum into a LISA. The government also adds an additional 25% at the end of each tax year. If you make the full £4,000 contribution the government will add a further £1,000 at the end of the tax year. You are limited to only contribute up to age 50. If you remove any money from your LISA you are not eligible to get the additional contribution from the government that tax year.
One way that it could prove particularly useful is between couples where one does not earn enough to make large pension contributions on their behalf. You can contribute up to £2880 net to a pension without having any eligible income and the government will gross it up to £3600 an additional £720. With a LISA you can contribute up to £4000 with an addition £1,000 from the government with no eligible income test applicable for a LISA. This makes the LISA more tax efficient in these circumstances and the LISA is tax free on the way out therefore it is more tax efficient on the way out too. With a pension only 25% is tax free on the way out with the rest being taxed at the individual’s highest marginal rate.
Contributions into a LISA count towards your ISA allowance so effectively you can have £16,000 invested into a NISA and an additional £4,000 in a LISA which is all free from Capital Gains Tax. If it is being used for retirement purposes it provides a useful alternative to a pension. With the rules around pension constantly in flux it is always useful to have different sources of income in retirement so that income can be provided in the most tax efficient manner possible.
To discuss the different ways that you can provide for your retirement please get in contact. For any financial advice Bradbury Hamilton, are able to advise. Visit www.bradburyhamilton.co.uk or call Sheriar Bradbury on 020 7220 7274.