Should I use my Lifetime Isa as a supplementary pension?

Ive heard that the Lifetime Isa is a bad way of saving for a pension.

I’m 27 and hold a stocks and shares Lifetime Isa with Nutmeg, and I haven’t even considered whether there are legalities around what age I can take my private pension, something I haven’t needed to think about yet.

Assuming I want to take my private pension at 57, why wouldn’t I hold it in a Lisa and max out the government bonus, given I won’t be able to touch the money until then anyway? 

I’m maxing my Lifetime Isa to save for a house deposit, but could it be sensible to repurpose it as a pension?

If I wouldn’t be able to access the money until a certain age, why is that any different to a normal pension pot?

I’m maxing my Lisa in order to save for a house deposit, so my time horizon is much shorter, however, if my situation were to change and I can no longer use my Lisa for a deposit, what’s a sensible course of action?C.W., via email

George Nixon, This is Money, replies: It’s fair to say when we publish stories on the Lifetime Isa we tend to look at it through the lens of using it to buy a house.

If you open one, it gives you up to £1,000 a year in free government money if you save the full £4,000 Isa allowance. If you’re buying a house, it can be a no-brainer, as this is essentially a 25 per cent interest rate.

It can be opened by anyone aged between 18 and 40, and you can save into it until you turn 50. 

Both cash and stocks and shares versions are available, with five cash providers and six investment providers, one of which is Nutmeg.

These investment options range from the likes of Nutmeg which offer pre-allocated portfolios, to platforms like AJ Bell or Hargreaves Lansdown which allow customers to pick their own investments.

Stocks and shares Lifetime Isas are available from six providers, including Hargreaves Lansdown (above). Meanwhile cash accounts are available from five banks and building societies, including Skipton

Stocks and shares Lifetime Isas are available from six providers, including Hargreaves Lansdown (above). Meanwhile cash accounts are available from five banks and building societies, including Skipton

Of course, those with stocks and shares Isas will have taken a hit since the start of February from falling markets due to the coronavirus outbreak, but it is always said that investing is for the long-term. 

This means that if you are investing at the moment with an eye on retirement, you shouldn’t necessarily be too worried about the performance of investments right now. But if you’re looking towards buying a home in the next few years, a cash Lifetime Isa might be a better option.

Whichever form you choose, money saved can be used to buy a first home; or withdrawn once you turn 60. Withdraw the money for any other reason and you’re hit with a 25 per cent penalty charge.

It is true to say that opinion is split on the use of it for retirement, but Chris Noon, partner at pensions consultants Hymans Robertson, said: ‘The Lifetime Isa is potentially a great vehicle for either saving for a deposit for a house or as a long-term saving solution for pension or even paying off your mortgage in later life.

‘The long-term savings benefits of Lifetime Isas haven’t been discussed much. For many savers, a Lifetime Isa can offer benefits that are the same or better than saving to a pension plan.’

Meanwhile, Jon Greer, head of retirement policy at Quilter, a wealth manager, said: ‘The Lifetime Isa emerged a few years ago as a muddled concept. It always seemed its primary purpose was to help people save for their first home and then they tacked on an extra element – it could also be used for retirement.’

Both agree however the important thing to do is look at the fine detail of how both schemes compare. Greer said: ‘It’s important to look at what pensions have to offer and how it compares to a Lifetime Isa.

‘First off while the Lifetime Isa offers an eye catching 25 per cent government boost worth up to £1,000 per year, a pension also offers a nice boost to your own funds. 

Jon Greer, head of retirement policy at wealth manager Quilter: 'It's important to look at what pensions have to offer and how it compares to a Lifetime Isa'

Jon Greer, head of retirement policy at wealth manager Quilter: ‘It’s important to look at what pensions have to offer and how it compares to a Lifetime Isa’

‘When you pay into a workplace pension you have employer contributions; and often larger companies match your contributions up to a certain level – something that can be worth thousands of pounds.’

These employer contributions are one of the biggest parts of a pension missing from a Lifetime Isa.

Under the latest pension rules, employers must pay at least 3 per cent of your monthly pre-tax pay into your pension each month, and some will match your own contributions or even put in double. It is worth checking this with your employer.

Noon said: ‘Make sure you pay enough into pension to get the maximum contribution payable by your employer. Also, the 25 per cent government Lifetime Isa bonus is only payable to age 50. So, saving into a pension is likely to be more financially beneficial for people over age 50.’

STEVE WEBB ANSWERS YOUR PENSION QUESTIONS

       

This of course only applies to those in employment, those who are self-employed may have to choose between a Lifetime Isa and a self-invested personal pension instead.

However, when saving money into either a Lifetime Isa or a pension, it is worth remembering they have big differences in their annual allowances.

‘The Lifetime Isa is limited to £4,000 a year of saving’, Noon said. ‘Pension limits are much higher than this for the vast majority of people – up to £40,000 of tax-efficient saving in a year.’

Tax breaks

The 25 per cent Government bonus on the Lifetime Isa mimics pension tax relief, in that for every £1 saved into a pension the Government effectively adds 20p for basic rate taxpayers and 40p for higher rate taxpayers.

This makes the picture nuanced. Greer said: ‘Higher rate tax relief is larger for a pension than the Lisa.’

‘The 25 per cent bonus is very similar to the tax saving on pension savings for a basic rate taxpayer’, Noon said, and is actually better for many individuals paying no tax – i.e. earning below around £12,500.

‘However, for higher and additional rate taxpayers, the tax incentive to save into a pension is higher than the 25 per cent Government incentive to an Isa.’

‘The Lisa is more tax efficient if you are basic rate taxpayer in work and retirement but not if you are a higher rate taxpayer during work and then a basic ratepayer in retirement’, Greer added.

Accessing your money

There are also differences when it comes to accessing your money. Money in a Lifetime Isa can be withdrawn tax-free at the age of 60, while pension pots can be tapped at age 55, or 57 from 2028.

25 per cent of a pension pot can be taken as a lump sum tax-free, but the other 75 per cent is subject to income tax. ‘The Lifetime Isa can be taken three years later than a pension but there is much more flexibility to access the money – and, if you wanted, you could put some of the proceeds into a pension at that point.’

Investing

Chris Noon, partner at pensions consultants Hymans Robertson: 'If an individual has been saving for a home and then decides to use the Lifetime Isa for their pension, they should look at the investment strategy to ensure it is suitable for the new purpose'

Chris Noon, partner at pensions consultants Hymans Robertson: ‘If an individual has been saving for a home and then decides to use the Lifetime Isa for their pension, they should look at the investment strategy to ensure it is suitable for the new purpose’

Both pensions and stocks and shares Lifetime Isas are investment products, meaning they are reliant on the fluctuations of the stock market. 

While over the long-term this tends to result in higher returns, it means short-term there can be some instability.

It also means you are likely to scale down your investment risk, how much an investment goes up and down, if you are looking to buy a house a few years than now, rather than if you are retiring at 60.

Noon said: ‘In the specific question being asked here, if an individual has been saving for a home and then decides to use the Lifetime Isa for pension purposes, they should look at the investment strategy to ensure it is suitable for the new, longer term purpose.’

He also recommended checking the charges levied by investment platforms offering Lifetime Isas compared to your workplace pension provider, as the former are often higher.

George Nixon, This is Money, added: At a time when people have more and more jobs and more and more pension pots as a result, a repurposed Lifetime Isa may well end up as just another one.

But as our two experts have said, there are some big differences between the two savings vehicles, and pension savers need to be aware of those.

What’s more, saving for a house is very different to saving for a pension, so as Chris Noon stated, make sure you are taking the right sort of investment risk and make the right decisions, depending on what your goal is.

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