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This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. The Financial Conduct Authority does not regulate tax advice.
The new Lifetime ISA
The new Lifetime ISA, dubbed LISA, was launched in April 2017 as a means for young people to save for their first home and their retirement simultaneously. Aimed to help somewhat to tackle a couple of real issues in the UK with home ownership and a lack of retirement planning.
Key points on the ISA:
- Available to open for everyone between age 18 and 40
- You can contribute up to £4,000 per year
- The government contribute 25% tax-free bonus, up to £1,000 per year
- Interest or investment growth will also accumulate on both your contribution and the bonus
- The bonus is available on contributions up to the age of 50
- Funds can be used to pay for a deposit on a first property, or taken for any use after age 60
Tax breaks of Lifetime ISA versus pensions
Unlike pensions, your employer will not be able to contribute to your retirement plan.
Also, unlike pensions you will not receive tax relief on the contributions you make.
However, you will not pay tax when drawing money from your LISA for retirement. This is different to pensions, where tax is payable at your rate of tax; i.e. basic, higher or top rate, after a 25% tax-free lump sum.
If you are a higher-rate tax payer then pensions still hold more tax benefits as you will receive a 40% tax relief on your pension continuations, which is double what you would receive if contributing to a LISA.
However, some higher rate tax payers are still using a LISA as an alternative product to diversity their portfolio.
Basic rate tax payers need to carefully plan their savings, investments and pensions according to their long-term financial goals.