Since the LISA was announced in March 2016 by then Chancellor George Osborne, it has been discussed as a possible alternative to traditional pension schemes.
Here are seven things to know about what could be next year’s latest trend in savings.
1. A halfway houseThe LISA will be available from 6 April 2017 and is a halfway house between a pension and a traditional ISA. It has been designed with enough flexibility to persuade a younger generation to start saving, and the Government hopes that investors will then use their LISA to save for retirement.
2. Government contributionThe Government will contribute a sum equivalent to 25% of the amount an investor puts into their account, subject to a maximum annual investment allowance of £4,000. This makes it very attractive for those wanting to save towards their own home. However, it is worth remembering that, if you encash the LISA early for reasons other than buying a house or retirement at age 60, the government will take back 25% of the total fund value.
3. Good for young workersExperts have described the LISA as a ‘no brainer’ for younger workers saving towards their first home. Martin Lewis of MoneySavingExpert has
said: “The fact that the state add 25% on top of what you save means nothing else comes close – it is literally money for nothing.”
4. Things to considerThe choice of whether to use pensions or LISAs depends on several variables, including the tax status of the investor while saving and in retirement, whether they are employed or self-employed, whether they work for an employer that will contribute to their pension and whether they have access to salary sacrifice. The experts say that it isn’t possible to generalise on whether it is better to use a LISA or a pension to aid retirement planning.
5. Easy cashIt is much easier to take cash out of a LISA as and when you need it, which means they are more likely to appeal to a younger audience.
6. Over 50sWhen deciding which tax-efficient scheme is best, investors should look at what happens when they reach the age of 50. Investors can only make contributions into a LISA if they open an account between the ages of 18 and 40 and must stop on their fiftieth birthday. If the investment maximum remains at £4,000 a year, this will limit LISA retirement savings to a possible maximum of £160,000.
7. Piece of the puzzleThe best outcome for investors building up retirement funds is likely to result from using a combination of products, including LISAs and pensions. “There use should be considered as part of a wider financial plan,” says David Crozier CFP
TM, Navigator Financial Planning. “The plan should be reassessed every year or two to see if the investor’s circumstances have changed and whether the mix of investments is still appropriate.“
The original version of this article was published in the July 2016 print edition of The Review.