People using Lifetime ISAs (LISAs) for retirement saving could get ‘double bubble’ on bonuses by investing their fund in a pension at age 60
Someone who paid the maximum £4,000 a year into a LISA – boosted by a £1,000 annual upfront bonus to £5,000 – from age 18 to 49 could have a fund worth around £483,000 by their 60th birthday*
Provided they had sufficient earnings, they could access the fund tax-free at 60 and reinvest £32,000 a year in a SIPP – gaining an additional £8,000 each year via upfront pension tax relief
If the investor did this each year until their 65thbirthday they would benefit from an extra £40,000 in ‘free money’ (5 x £8,000)
Tom Selby, head of retirement policy at AJ Bell, comments:
“People using a Lifetime ISA (LISA) for retirement saving could have the opportunity to get ‘double bubble’ on their bonuses when they reach their 60thbirthday.
“LISAs benefit from an upfront bonus of 25% on subscriptions up to £4,000 a year – meaning an annual £1,000 in free money is up for grabs. What’s more, savers can access the money without any government withdrawal charge or tax penalties from their 60th birthday.
“An 18-year-old paying the maximum into a LISA until their 50th birthday and enjoying 4% annual investment growth could have a fund worth £483,000 by the time they reach age 60.
“If this isn’t juicy enough, provided they have sufficient earnings (and are not subject to the money purchase annual allowances) they could reinvest up £32,000 a year of this cash in a pension, benefitting from £8,000 a year in basic-rate pension tax relief.
“If they do this for 5 years, they’ll have added an extra £40,000 to their retirement pot in tax relief alone.”
Things you need to think about
“The starting point for any retirement saving should be your workplace pension, where you benefit from upfront tax relief and a matched employer contribution. Opting out of your workplace pension into a LISA will almost certainly leave you poorer in retirement.
“For retirement savings outside the workplace – or for people who don’t benefit from automatic enrolment such as the self-employed – whether or not a LISA is the right option will depend on your personal circumstances.
“If you are a higher or additional-rate taxpayer, the tax relief available from a pension – at 40% or 45% – is significantly higher than the 25% upfront LISA bonus (equivalent to 20% tax relief).
“However, for basic-rate taxpayers the combination of an upfront bonus and tax-free withdrawals from age 60 makes the LISA an intriguing retirement saving alternative – particularly when you consider the opportunity to use the tax-free funds to benefit from additional pension tax relief at age 60.
“It’s important to remember that withdrawals from pensions will be taxed as income. However, in most instances, 25% of withdrawals are tax free and you can minimise your tax bill by drip-feeding withdrawals over time to make use of your personal income tax allowance.
“Finally, as with all savings decisions, it is possible the Government will shift the landscape between now and your 60th birthday. For example, the pensions annual allowance has been repeatedly cut back since 2010, so there is no guarantee it will be £40,000 in 30 or 40 years’ time. However, you can only plan with what is in front of you today and the LISA is a very tax efficient way of saving anyway.”