The Investor 90

IN YOUR INTEREST

THE INVESTOR

Since April, every person

reaching retirement age has

been eligible for the new

State Pension of £155.65

a week. That sounds both

generous and simple but

there is a catch: only those

who meet the requirement

of 35 years of full National

Insurance contributions

– up from the previous 30

years – will qualify for the

full amount. A surprising

number of people will not.

The Institute for Fiscal

Studies estimates that just

17% of those reaching

State Pension age in the

next four years will get

the £155.65; and, while

23% will get more than that

flat rate, 61% will receive

less

. That is a combination of

the transitional arrangements

after the phasing out of the

old Second State Pension,

the fact that many will

not achieve the full 35-year

contribution record, and

reductions in payment

for those who were

contracted out of the Second

State Pension.

Anyone can check their

entitlement by getting a

pension forecast from the

Pension Service. Those who

are ineligible for the full

amount may be able to buy

extra contributions to top up

the State Pension. Whether

this will be beneficial or

not depends on individual

circumstances and it is

important to seek advice

before acting.

will be paid

directly to the

conveyancer.

If money is

withdrawn for

any other reason

before the age of

60, savers will lose

the government bonus and face a 5%

withdrawal charge.There will, however,

be exemptions for those suffering from a

terminal illness; the government is also

considering whether exemptions should

also be available for other significant

life events. If the holder dies, a LISA

will be treated in the same way as other

ISAs, so the funds will form part of the

deceased’s estate for IHT purposes.After

age 60, full or partial withdrawals can

be made without penalties or tax; while

dividends received within the ISA are

free of IncomeTax.

Contributions to a LISA will,

however, count towards the overall

annual ISA contribution allowance,

which is to be increased to £20,000

from next April. More information

will be available when the draft

legislation is published.What is clear

is that it is likely to be seen as an

alternative to pension provision: so

how do the two compare?

While the 25% bonus sounds the

same as basic rate tax relief, it differs

in key respects. It will be paid at the

end of the tax year and monthly

withdrawals, which can be made for

pensions (after the age of 55), may

not be possible.That could mean the

eventual LISA fund will be smaller than

would be the case for the equivalent

investment in a pension.

The government bonus stops at age 50,

while tax relief on pensions continues as

long as relievable

contributions

are made to the

fund – subject

to annual

and lifetime

maximums.

Contributions

are personal payments and it is not yet

clear whether employers will be able

to pay into a LISA. Most importantly,

higher rate taxpayers get tax relief at

their highest marginal rate – which

could be up to 45% – while the LISA

bonus is capped at 25%.

The key differences lie in the

‘upfront’ incentive and the tax on the

withdrawals. For basic rate taxpayers,

both a pension and a LISA will deliver

substantially the same benefits while

contributions are being made.When

benefits are being taken from the fund,

however, withdrawals from LISAs will

be completely tax free, whereas only

25% of a pension fund is tax free, with

the remainder being taxable at the

highest marginal rate(s).

For higher and additional rate

taxpayers, and especially those who

expect to pay only basic rate tax on

withdrawal of benefits, the value of the

‘upfront’ tax relief may tip the balance

in favour of the pension – especially if

an employer contribution is made.

As ever with these things, the

decision on which vehicle to use will

depend on individual circumstances;

indeed, a mixture of the two may be

most appropriate. It is essential to seek

informed professional advice.

NEW STATE

PENSIONS

Save up to £4k each

tax year

Government adds

25% bonus

LISAs are only open

to under-40s

Savings can also be

used to buy first home

LISA IN A NUTSHELL

1. Institute for Fiscal Studies,

Balance sheet

LISAs will encourage the under-40s to

save a deposit to buy their own home or for a pension.

Seek advice from your St. James’s Place Partner.