Lifetime ISA’s or LISA’s as they’re known were announced in March 2016’s budget as a new form of ISA designed to encourage longer term savings for the younger population for two key purposes, purchasing a new home and/or retirement. These alongside the auto enrolment requirements are likely to leave younger employees with ever more questions as to the best long term savings route for them.

LISA Q&A

LISA’s are due to be launched on 6th April 2017 and to help we’ve provided below a simple Q&A covering the most common questions we get asked on this subject. Please note these are provisional answers to the questions as we understand them today BUT could change prior to the 6th April 2017 launch so please treat this as general ‘yet to be finalised’ information.

  • Who can have one? You must be aged over 18 and under 40 (on the 6th April 2017)
  • How much can be paid into a LISA? £4,000 per tax year either regularly or as lump sums. The £4,000 counts towards an individuals total £20,000 ISA tax year allowance (from 6.4.17)
  • What is the Government’s bonus? 25% of the contributions paid in e.g. if you save £4,000 in a tax year the bonus paid at the end of the same tax year would be £1,000
  • How long is the bonus paid for? Until you reach age 50. Therefore the maximum bonus anyone could receive is £1,000 x 32 (age 18 – 50) i.e. £32,000
  • Are there any withdrawal penalties? If money is withdrawn prior to age 60 for any other reason other than to pay towards your first property then you will pay a 25% penalty on the money withdrawn. This withdrawal penalty does not apply in the first year i.e. prior to receiving the first bonus. There has been talk of other instances that an individual may be able to make penalty free withdrawals prior to age 60 but these are unlikely to be in place by the 6th April 2017 launch
  • Explain the two specific LISA purposes? 1) For first-time buyers to use towards a residential property (costing less than £450k in London and £250k elsewhere) that you then live in and 2) To use towards your retirement once you reach age 60; you don’t have to have actually retired this means assisting toward later life expenditure
  • Is the money taxed in the LISA and when I take it out? No
  • What can a LISA invest in? Both Cash and Stock & Shares

LISA or Pension?

LISA’s provide another positive long-term savings option for the younger demographic and as such are to be encouraged however we don’t see these as a direct replacement for a pension but inevitably employees will start to consider one against the other once LISA’s become available and more publicised.

LISA have the advantage over pensions of being able to access the money tax free at anytime (although there could be a penalty for doing so) plus they can be used towards the cost of purchasing a first home. The money can be withdrawn tax and penalty free from age 60.

However a pension with a fully or part matched contribution from an employer (such as with Auto Enrolment) and/or 40% higher rate tax relief on a contribution would usually make the pension financially better than a LISA. In addition you can access money from a pension from age 55, the money is usually Inheritance tax free, it doesn’t affect any (pre retirement benefits entitlement and is protected from creditors in bankruptcy, all of which are not features of a LISA.

As with all financial matters it comes down to the individual’s personal circumstances, priorities and needs as to whether one option is better for them than another or whether a combination of different arrangement would be best.

Employee Financial Education

What the introduction of LISA’s does is further highlight the huge value employee financial education can provide. A facility that helps employees understand their long-term savings options which as a result ultimately leads them to make appropriate long-term financial decisions, could actually be life changing.

 

 

If you would like to discuss LISA’s or the options Wingate have for the provision of employee financial education please contact your usual contact or one of our strategic benefit consultants on:

T: 01883 332260 or

e: info@wingatebs.com

 

This information is based on our current understanding of legislation which can change without notice.  Professional advice should always be sought prior to making any changes to your arrangements or deciding on any action in this respect. This information should NOT be treated as personal advice or recommendation.

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