Lifetime ISA v Pension

by | May 17, 2016

You will have seen from our previous blog details of the new Lifetime ISA which will become available in April 2017.  The question many are now asking is whether this new ISA could rival traditional pensions.

The new Lifetime ISA is set to boost contributions with a Government top-up if savings are left untouched before retirement. This, of course, is comparable to the tax relief currently available on pensions.

Lifetime ISAs have two potential users, those saving to buy a home or those needing a place for money to be held until retirement (at least age 60).  Anyone who thinks they many need access to the money for other reasons should not look to the Lifetime ISA as heavy penalties are levied on withdrawals. 

If you are considering a Lifetime ISA for retirement savings it is important that you weigh up the benefits of tax relief available on pensions v the Government top-up on Lifetime ISAs. 

Pensions – for a basic rate taxpayer a £100 pension contribution immediately turns into £125 for 40% and 45% taxpayers the value rises even further effectively to £167 and £182 respectively.  Contributions grow tax free until retirement at which point 25% of the money withdrawn is tax free and income tax will be payable on the rest. 

Lifetime ISA – these will work slightly differently.  The boost to savings is a 25% top-up to anything that has been contributed which is paid once each year.  A total of £4,000 can be paid in each year resulting in a maximum top up of £5,000. 

In short and looking at the facts, basic rate taxpayers could potentially be better of using a Lifetime ISA to save for their retirement provided their tax rate remains the same.  Higher rate taxpayers are likely to be better off using a traditional pension scheme provided their tax rate falls in retirement, if it remains the same then a Lifetime ISA might be a more favourable option. 

There is nothing to stop individuals saving in both a pension and a Lifetime ISA and it will suit many to do both.

Finally it is worth noting that money saved inside a pension is sheltered from Inheritance Tax, unlike Lifetime ISA savings.  If you would like to discuss how you can use pensions and Lifetime ISAs as part of your wealth planning please speak to your usual ABG contact who will be happy to assist or recommend a qualified independent IFA if necessary.  







Arram Berlyn Gardner is not authorised under the Financial Services and Markets Act 2000 but are able in certain circumstances to offer a limited range of investment services to clients because we are members of the Institute of Chartered Accountants in England and Wales.  We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. 


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