The Lifetime ISA, which everybody except the Treasury calls LISA, was one of Mr Osborne’s 2016 Budget surprises. It looked very much like the replacement for pension plans which had been floated by various organisations in the run up to March (Pension Bristol).
The main facts about LISAs, as they have emerged so far, are:
- They will come into being from April 2017 and will be available only to the under-40s;
- The maximum contribution will be £4,000 per tax year, which will count towards the overall ISA limit (£20,000 from next April);
- The government will pay a 25% bonus on the contribution made in a tax year at the end of that year, provided the subscription is made before age 50;
- The bonus (plus any interest or growth on it) will be clawed back and a 5% penalty levied on withdrawals unless they are made either:
- From age 60 onwards, or
- For the purchase of a first home (subject to a maximum value of £450,000); and
- The tax treatment will be the same as for existing ISAs, meaning that no UK income tax and no capital gains tax will be payable.
Smoke and Mirrors
The 25% bonus has the same effect as basic rate tax relief for a pension contribution – but sounds better. If you are a basic rate taxpayer making your own contribution and receiving the bonus, the LISA is superior to a pension because at 60 you can draw 100% of the LISA’s value as a tax-free lump sum, whereas only 25% of a pension plan is tax-free, with the other 75% taxable.
The mathematics are not as simple if your employer contributes to your pension and/or if you pay tax at more than basic rate (you do not get a bigger LISA bonus, but you do receive more tax relief on a pension contribution). Automatic enrolment into workplace pensions complicates matters further.
If you have to make a choice, then with very few exceptions your automatic enrolment pension contribution will be more valuable than a personal LISA contribution. The reason is the employer’s mandatory pension contribution which, as a general rule, will be contingent on you making a contribution.
In theory employers will be able to contribute to LISAs, just as they can to ISAs. However, such contributions have to be treated as pay and are therefore subject to income tax and National Insurance contributions.
The most worrying aspect of the LISA is that it will set up an alternative savings vehicle to pensions. The pre-Budget leaks suggested that Mr Osborne had abandoned his planned radical reform of pension taxation primarily because he did not want to unsettle the electorate ahead of June’s referendum. It is quite possible to imagine that in a future Budget Mr Osborne (or his post-Brexit successor) will announce that the age 40 limit for LISAs has been scrapped…along with income tax relief for pension contributions.
The message from LISA is that while full income tax relief on pension contributions is available in 2016/17, its long-term future remains in doubt.
Now is the time to review your pension contributions and take advantage of the carry forward rules. To see how much you could contribute, talk to us as soon as possible.
Pension Bristol And Financial Advice Bristol
If you would like to speak with one of our Independent Financial Advisors and potentially receive financial advice, please contact us on 0117 923 7652. We are based in Clifton, Bristol but we are happy to service clients from across the UK and we provide free initial meetings at our client’s convenience.
Churchill Wealth Management Limited is located at 13 Alma Vale Rd, Bristol BS8 2HL, United Kingdom.
About Us: Churchill Wealth Management is a team of independent financial advisors/financial advisers (IFAs) based in Clifton, Bristol. We provide independent financial advice, including pension advice, investment advice, inheritance tax planning and protection/insurance advice.