In our last article, we looked at the new Lifetime ISA as announced by the government in the recent budget. Many people could be forgiven for thinking that the Lifetime ISA is a straightforward alternative to saving into a pension.
Whilst the introduction of this new type of government incentivised savings vehicle is designed to encourage younger people to save more throughout their lifetime, there are a number of clear differences between the Lifetime ISA and a traditional pension that will determine whether they are a suitable vehicle for retirement planning.
Here we look at the potential benefits of utilising the Lifetime ISA, comparing it against pensions and providing some pointers to look out for.
Lifetime ISA vs Pensions
The Lifetime ISA is worth looking into if:
- You are self employed, or otherwise don’t get the benefit of an employer pension contribution
- You’ve made the maximum contribution via your pension in any one year
- You want to supplement existing pension and ISA savings
- You might require early access to your retirement money in an emergency, (remember you will lose the government bonus, growth on the bonus and incur a 5% penalty)
- You are saving towards buying your first home.
Pensions may be more suitable if:
- You are in a workplace pension to which your employer contributes. Under auto enrolment rules your employer will contribute at least 4% by 2019
- You want to access your money earlier in retirement. Any withdrawals from a Lifetime ISA prior to age 60 will be subject to a 5% fee , whereas pension benefits can currently be accessed from age 55
- You are a higher rate tax payer and therefore qualify for pension tax relief at 40%
- You want to make significant pension contributions past the age of 50
- You want to use retirement funds to pass wealth on to future generations, free of inheritance tax.
Overall, the Lifetime ISA offers an alternative to younger people who might otherwise save into a personal pension. However, as outlined above, pensions will often afford wider flexibilities and will certainly provide a more tax efficient method of cascading wealth to the next generation. The ideal positon would be to consider saving into both a Lifetime ISA and a pension and consider the Lifetime ISA as an additional savings vehicle, rather than a replacement to pensions.
Making the Right Choice
As ever, the way in which you should consider using Lifetime ISAs and indeed pensions will depend on individual circumstances.
For more information or advice on how to utilise savings vehicles for financial and retirement planning, please get in touch. Our Manchester based independent financial planners will be happy to help.