Should Savers Be Interested In LISA?
Not to be confused with the famous character in ‘The Simpsons,’ the LISA was amongst the changes that George Osborne itemised in his 2016 Budget to Parliament. Known officially as the Lifetime Individual Savings Account, or LISA, it is the new attempt by the Conservative Party to encourage the UK population to start saving and as an alternative to the traditional pension.
But what is it? And who does this appeal too?
Aimed at anyone aged between 18 and 50, the LISA is designed for people to flexibly save over the long-term. The idea is that it will help savers get onto the property ladder and also be a source of income during retirement.
From April 2017, Savers will be able to set up a LISA alongside their existing Cash ISA and Stocks and Shares ISA. The main difference is that the government have agreed a 25% bonus as a top up to your contributions. From next year you will be able to contribute up to £20,000 p.a. into your ISA’s, but from that only £4,000 of that can go into the LISA. The maximum therefore you can receive as a bonus from the Government at the end of each tax year is £1,000; or £32,000 over the lifetime of the LISA.
The main advantage of the LISA is that once you reach age 60, you will be able to withdraw your savings tax free. Which when you compare to a pension that can only withdraw 25% tax free, it can be seen as a better alternative. For those self-employed this might be a better alternative, but is it better for an employee?
The answer I’m afraid depends. If you are in an occupational pension scheme with both employee and employer contributions, it would be unwise to opt out in favour of the LISA as you would lose your employers contributions. Similarly pension contributions are subject to tax relief of up to 45%. If you are a higher rate tax payer, you would be better off paying into a pension, receiving tax relief of 40% and then paying the basic rate of tax when you retire.
Not only this, but if you withdraw money from the LISA before you reach age 60, or for any other reason than to purchase your first property, you will be charged at 5%, lose the government bonus and any interest earned on top. You could say therefore here lies the incentive to continue saving.
So will it work? It seems that only time will tell if this appeals to savers, first time house buyers and those looking to retire. Once again it is another investment product that has both its appeal and limitations, but it does provide investors the ability to broaden their portfolios.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.