For young doctors and dentists
The new Lifetime ISA (LISA) will be introduced in April 2017, aimed to help young people to save for their first home and their retirement, simultaneously. Available to all under 40 year olds, it holds several tax planning benefits for young doctors and dentists that could see you with more in your retirement pot than just your pension alone.
Retirement planning with pensions and ISA’s
The Lifetime Allowance (LTA) for pension investment has recently dropped to £1,000,000, making the requirement for careful retirement planning, and subsequent tax planning, even more particular.
Paying additional money into a pension over the LTA is highly likely to trigger a tax charge. Could investing in a LISA be the top-up to your retirement plan that you need?
Planning for basic rate tax payers
Pensions attract a 20% tax relief, meaning that if you invest £100 this becomes £120 when in your pension pot.
With the LISA, the government provide a 25% bonus, meaning that if you invest £100 this becomes £125 in your bank account.
There is a greater difference though. Drawing money from a LISA will be tax-free, after the age of 60. Withdrawing money from a pension will be treated as earned income and taxed accordingly, after a 25% tax-free lump sum option.
If you are a basic rate tax payer it is worth taking this into account.
Planning for higher rate tax payers
Higher rate tax payers currently get 40% tax relief, or 45% for top rate tax payers, which far exceeds the 25% LISA bonus.
From a short to medium term tax perspective, pension contributions do help your annual tax position. However, if you are a doctor or dentist who has, or is likely to exceed the LTA for pension contributions, paying into a LISA and taking the 25% bonus could be an option for longer-term tax planning.
Combining pensions and ISA’s
It certainly is a viable option for young doctors and dentists to do both; pay into a pension to reap the short-term tax benefits whilst topping up your retirement fund by investing into a LISA.
It is important to note that with the LISA, if you withdraw money before age 60, that isn’t for your first home, then you lose the opportunity for the 25% bonus and the growth interest, plus, you’ll have to pay a 5% fee.
Although, this is still more flexible than investing into a pension, where-by you will only be able to draw money from the fund after age 55.
As with most things financial, bespoke advice helps to ensure that your personal situation, goals and aspirations are factored in too, before making any decisions.
Before you go…
Don’t forget to download our LISA guide, providing more information about this new investment, available from April 2017.
Want to find out more about LISA? Speak to Darren
Dental & Medical Financial Services help doctors and dentists secure a happy retirement through forward planning. Call Darren for bespoke advice.
Tel: 01403 780 770