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ANALYSIS
NEWS
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THE INVESTOR
Although Chancellor George Osborne may have
abandoned his plans for a radical reform of the pension
system, the Lifetime ISA (LISA) – introduced in his latest
Budget – is designed to encourage people to save for their
first home or for retirement. From April 2017, anyone aged
from 18 to 39 will be able to invest up to £4,000 a year
into this new savings scheme, which will be topped up by
a 25% government bonus up to a maximum of £1,000. It
is available to each individual, so couples could invest
£8,000 a year and earn a £2,000 government bonus.
Withdrawals for any reasons other than to buy a first
home or reaching the age of 60 will incur a 5% penalty
and lose the government incentive, together with any
interest earned on it. The existing ISA allowance is also
being raised from the current £15,240 to £20,000 from
April 2017 – an increase of almost a third. This
means that a new total £20,000 limit will apply to all
forms of ISA.
The combination of ISAs may reduce the attraction of
pensions. However, the two can be complementary;
investors will need to consider the most appropriate
blend, depending on their circumstances and age.
Contributions to LISAs and ISAs are made from taxed
income but the proceeds can be withdrawn tax-free.
With pensions, however, it’s the other way round:
contributions attract tax relief, while withdrawals are
taxed. But the tax incentives are being eroded through
the imposition of annual and lifetime limits. For high
earners with a taxable income of more than £150,000,
a taper reduces tax-relievable contributions to a
maximum of £10,000 for incomes above £210,000.
The level of tax relief on pension contributions is
still attractive, despite the growing restrictions. The
significant increase in the ISA limit means it is also
a good savings vehicle that can help accumulate a
significant tax-free lump sum. The government incentive
for LISA savings is generous, although it has to be
weighed against the restrictions on access. It is essential
to seek advice on the best combination of savings vehicles
for your particular needs.
RETIREMENT
NEW LIFETIME ISA FROMAPRIL 2017