The media love to Budget Bash, and the commentary following the March 2016 Budget has been no different. This time, it is poor Lisa that has felt the brunt of such flippant retort.
LISA (Lifetime ISA) is simply an alternative option to paying into a pension – the main difference being that tax relief is given on withdrawal, not contributions. Rather than dwell on the limitations, we will look at the positives – there are plenty.
LISA is nothing new. We simply have to refer to the American model of saving for retirement, where there is an alternative to paying into a traditional DC arrangement - known in the States as a 401(K). If you don’t fancy a 401(K), you always have the option of a Roth 401(K), which offers tax relief on withdrawal – not contributions. Yes, there are subtle differences between a LISA and Roth 401(k), but the principle is broadly similar.
The Roth 401(K) was introduced on 1 January 2006, and has never superseded the ‘traditional’ 401(K). In fact, they have been working harmoniously, side-by-side, ever since inception. To suggest that LISA will replace DC arrangements is both unfounded and, to be honest, lazy journalism.
Like a Roth 401(K), LISA may prove a fruitful alternative for those saving at the front end of their career. That is, individuals who currently pay little or no tax at present, but foresee professional development that will make them higher rate tax payers in the future. As such, when it comes to drawing your LISA, your high(er) earnings will be irrelevant for the purposes of tax.
Also, for a basic rate tax payer, the loss of tax relief on contributions is made up by the 25% bonus added to your savings by the Government (up to a maximum of £1,000 per annum). Of course, employees will miss out on employer contributions with LISA, but we must recognise the increasing number of people who are self-employed – who don’t have access to an occupational pension, and will surely welcome LISA as a way of saving for retirement.
LISA is also good news for those looking to save for their children’s future in a tax efficient way. The LISA cap of £4,000 per annum exceeds the £3,000 ‘gift’ allowance which is exempt from inheritance tax. Yes, you could do this with a pension, but with a LISA you are able to access the money before retirement – meaning you have greater flexibility (another 1-up for LISA on the pension).
Before you dismiss the idea of a LISA, make sure you fully research the benefits, and take the media criticism with a pinch of salt.
It’s difficult to fully conceptualise the anti-LISA brigade, although I suspect it’s a cultural thing. Since time immemorial, the British simply don’t like change.
Gareth Hopkins is Director at GJH Pensions. To keep up to date with all the latest GJH Pensions news you can subscribe to our newsletter here or follow us via twitter @GJHPensions. GJH Pensions are an independent consultancy offering practical solutions to all things pensions. Our industry expertise, and personal approach, means we can truly understand the bespoke requirements for each client. Contact GJH Pensions today for a free consultation on 07446 148 537 or email firstname.lastname@example.org.