Lifetime ISA vs Pensions
The Lifetime ISA was launched on 6th April 2017 as the latest ISA product. Savers now have to question where the best place to invest their savings is. The Lifetime ISA is a long term savings vehicle for retirement planning. Savers with only a certain amount of disposable income to invest must decide between a pension or the new Lifetime ISA.
Age Eligibility
| Lifetime ISA | Pension | |
|---|---|---|
| Starting Age | 18 | 0 |
| Ending Age | 40 | No upper age |
Pensions are more flexible for clients of all ages wanting to save. The Lifetime ISA can only be opened between the ages of 18 and 40.
Maximum Contribution
| Lifetime ISA | Pension |
|---|---|
| £4,000 can be contributed up until you reach 50 years old. | Unlimited, but a cap on the amount that will receive tax relief is set at your own UK Relevant Earnings. This has a further limit of £40,000 called the annual allowance which can generate a tax charge for contributions above this allowance. |
Saving into a pension brings complex rules that need to be adhered to receive the maximum tax relief. These complexities make the Lifetime ISA more appealing for lower contribution amounts but for those who want to place large sums into a retirement vehicle then pensions are still the best places. With a pension others can help you save for your retirement. Employer contributions and third party contributions can be added to your pension fund. This is not possible for the Lifetime ISA.
Tax Relief on Contributions
| Lifetime ISA | Pension |
|---|---|
| 25% bonus on contribution paid | Basic rate tax payers receive 20% tax relief on contributions paid. Higher rate tax payers receive 40% tax relief on contributions paid. Additional rate tax payers receive 45% tax relief on contributions paid. |
Higher rate and additional rate tax payers will receive more tax relief contributing to a pension compared to the Lifetime ISA. For basic rate tax payers with contributions that will not exceed £4,000 the Lifetime ISA becomes very attractive. The amount basic rate tax payers will receive in tax relief/bonus is the same for both products but ISA receive better tax relief when the investment is returned.
Withdrawing
| Lifetime ISA | Pension | |
|---|---|---|
| Min Age | 60 | 55 |
| Options before min age | Tax free lump sum paid out on diagnosis of a terminal illness Early disinvestment charge at 25% Tax free withdrawal to buy your first home worth less than £450,000 | Tax free lump sum paid out on diagnosis of a terminal illness |
| Tax on withdrawals after min age | Tax free | 25% of fund value is tax free. The remaining funds taken are taxed at your marginal rate of income tax. Free of National Insurance Tax |
The Lifetime ISA can be accessed tax free as long as you are over 60 years old. Pensions are taxable income and will depend on your income levels to what tax rate you will charge.
Choice
With only nine providers offering the Lifetime ISA the choice that consumers have is very limited. This will limit the take up of the Lifetime ISA’s. There are hundreds of different pension providers with many differing products. It has become much simpler to transfer from one pension provider to another if you became unhappy with the service or product.
Investments
The investment choice of ISA’s are limited compared to pensions. Normal cash and stocks & shares ISA rule apply to the Lifetime ISA. Pensions allow much greater investment choice into assets like holding commercial property.
Tax within funds
Lifetime ISA’s and Pensions both benefit from the same tax advantages over holding the investments outside of the wrapper.
Death
| Lifetime ISA | Pension |
|---|---|
| On death the ISA will become part of the deceased estate for inheritance rules. Spouses can reinvest the death benefit proceeds back into ISA’s without using up their own ISA Allowance using Additional Permitted Subscriptions. | If Death occurs before age 75 the pension fund can move tax free to the beneficiaries If death occurs after age 75 then the pension will be taxed at the beneficiary’s marginal tax rate. Both will allow the beneficiaries to receive the fund into a new pension scheme or as a lump sum. |
Hartley View
The Lifetime ISA should be considered as part of the overall retirement planning process. There are pro’s and con’s for both products and we strongly recommend that you take independent financial advice before deciding. For pure retirement planning the pension will still be the best financial product for the majority of clients.
For more information on pensions please visit our pension technical section
For more information on ISA’s please visit our ISA technical section
