4 ways to fall back in love with LISA
10 September 2018
With pension tax relief up for review in Philip Hammond’s Autumn Statement, Charlene Young, technical resources consultant at AJ Bell, looks at how the much-maligned Lifetime ISA (LISA) could be used to top up retirement savings or meet investment objectives for younger clients and their family members.
There are four main scenarios where it could be crucial and certainly beneficial to open a LISA:
Annual allowance issues
Rumours suggest the Chancellor favours a further reduction in the pension annual allowance rather than the actual rates of tax relief, possibly going as low as £20,000. Clients with excess earnings and capital who have made use of their annual allowance and carry forward or are subject to the taper (or may be in the future) should consider opening a LISA before their 40thbirthday to supplement their retirement savings with a 25% bonus until they reach 50. It is worth remembering that a LISA can be accessed from age 60 completely free of tax or be left to manage as an ISA account.
Lifetime allowance issues
Drawing pension benefits seems like a long way off for clients in their 30s but with the lifetime allowance (LTA) currently at £1.03 million and only tabled to rise with CPI inflation each year, more savers are likely to be close to that limit at retirement – particularly if they are already making large pension contributions or will be in a position to do so in the future. Investors should consider opening a LISA before age 40 so they have the option of building up a fund (with a 25% bonus) completely outside of any LTA regime, which they can continue to pay into until they are age 50.
Pension contributions for non-earners are limited to the basic amount of £3,600 gross (net £2,880). The LISA carries no such earnings-based restrictions, so if a non-working spouse can open a LISA then an additional £4,000 can be paid in, which with the bonus would top up their retirement savings by £5,000 each year. The money would need to be gifted prior to the payment being made but over a number of years could provide a significant boost to funds that can be used in later life – accessible from age 60 completely free of tax.
Mortgage to repay
Homeowners can only access their LISA funds free of penalty once they reach age 60 (or in the event of terminal illness), but home-owning investors under 40 are also opening accounts as a mortgage repayment vehicle in place of one of the traditional uses of the pension tax free lump sum. Using the LISA toward mortgage repayment (or another investment objective) also preserves the value of funds held within a pension wrapper which are usually free from inheritance tax, unlike the LISA which would form part of the client’s estate upon death.
In order to ensure they don’t miss out, investors in any of the above scenarios need to open andfund a LISA before they turn 40. An investor who opens and funds a LISA for the first time age 39 can continue to pay in £4,000 each year until age 50 and qualify for the £1,000 government bonus. Assuming a net growth rate of 5% this could give a tax-free pot of over £127,000 at age 60.
The LISA is by no means a replacement for pension savings but the above scenarios show that, with some forward planning, it can provide a useful boost for retirement savings for those under 40.
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