Can the LISA and pension sit comfortably together?

4th May 2016

As announced in the Budget, a new Lifetime ISA designed to encourage younger people to save will be available from April 2017. It will be accessible for individuals under age 40, with a savings limit of £4,000 per year. Contributions will be topped up by the government by 25%, or £1 for every £4 put in.

It can be used for buying a first home (up to a value of £450k) at any time from 12 months after opening the account, or taken from age 60 without penalty, and is tax free. If accessed before then, the government top up will be lost, including interest, and it will be subject to a 5% penalty charge.

Jonathan Watts-Lay, Director, WEALTH at work, a leading provider of financial education in the workplace, supported by guidance and advice has looked at it in more detail and comments; “The LISA could be great news for young savers who want flexibility and access, as they will no longer have to choose between saving for their first home, or retirement, and what is effectively a minimum 25% interest rate is a great incentive. However the devil is in the detail. How will the LISA function in practice? Will it accept employer contributions as with pensions? Will individuals be able to contribute through ‘salary sacrifice’?

We will have to wait and see until the specific rules are defined for the LISA before it comes into play next year. Assuming it will work in a similar way to current ISAs then individuals may be able to, for example, take a ‘mix and match’ approach and choose whether the benefits they get from their employer are paid into their LISA or pension.

However, if employer pension contributions are instead used to fund a LISA, there will be no tax and national insurance relief as with pension contributions. At face value some individuals could be worse off with the LISA, but many may trade this in favour of flexible access to savings for a first home with the government top up.

Whether employees decide that the LISA is right for them or not, what will make a difference is how they are supported in making these decisions. It is not an easy decision to make because of the many variables involved such as; an individual’s age, accessibility, level of disposable income, income tax levels now and projected, if they have dependents to consider and what their short and long term saving goals are. The need for effective financial education, guidance and advice has never been more apparent.”