The Chancellor’s Budget U-turn on pension tax relief changes wasn’t the only surprise he had up his sleeve; he also unexpectedly announced that a new Lifetime ISA (LISA) will be introduced on the 6th April 2017.
Is a Lifetime ISA going to be a must-have for doctors and dentists?
Although the LISA is specifically aimed at helping young people simultaneously save for both their first home and their retirement (instead of having to choose one over the other), it also offers tax savings that would benefit the not-so-young.
NHS Pension Scheme members
With the lifetime pension allowance down to £1,000,000, paying extra into any form of pension now necessitates far greater thought and planning…particularly if you’re a medic under the age of 40.
The Lifetime ISA certainly isn’t designed to compete with the excellent benefits offered by workplace or occupational pensions, such as the NHS Pension Scheme, but having a LISA could become a serious consideration for any 18-40 year old wanting to save more for their retirement.
Basic rate vs high rate tax payers’ pension savings
Basic rate tax payer
If you’re a basic rate tax payer, you currently get 20% tax relief on your pension contributions. In other words, a £100 contribution becomes £125 when it’s in your pension pot. When the money is withdrawn, it’s then taxed as earned income (after the 25% tax free cash amount is taken).
With the Lifetime ISA, the government will add a 25% bonus onto the amount that you save each tax year. In other words, if you save £100 into a LISA, this £100 becomes £125 when it’s in your account.
The end result is the same, right? Not exactly; unlike a pension, withdrawals on a Lifetime ISA after the age of 60 will be tax free. This fact alone means that the Lifetime ISA could give a basic rate tax payer a better deal than a pension.
High rate tax payer
For high or higher rate tax payers, it’s not that clear cut. You currently get up to 40% or 45% tax relief on your pension contributions, which is much better than the Lifetime ISA’s 25% bonus.
But, if you’re a doctor or dentist who cannot top up your pension without going over the new lower lifetime allowance limit, getting a 25% bonus on your savings is an opportunity that shouldn’t be ignored. Plus, your investment won’t get caught up in the complex rules that surround pensions.
Accessing your money
Compared to a pension, the Lifetime ISA offers more flexibility to access your money.
You cannot normally withdraw money saved into a pension until you’re at least aged 55†. With a Lifetime ISA you can withdraw some or all of your money at any time although, inevitably, there is a potential sting here…
If the withdrawal isn’t to purchase your first property and you are aged under 60, you won’t get the government bonus (nor any interest or growth on the bonus) and you’ll have to pay a 5% charge.
Reducing your inheritance tax liability
After a lifetime of successful financial planning, it can be pretty hard to swallow an inheritance tax liability that will see your family facing a staggering tax bill on your death.
Anything currently over £325,000* for a single person or £650,000* for married couples and civil partnerships is taxed at 40%. There’s also the new main residence nil rate band coming into force in April 2017 which could, for some people, increase these limits…but let’s not digress here.
If you’re over 40, you’re too old yourself to have a Lifetime ISA. Your children (aged 18+) aren’t though. To help them get onto the property ladder or save towards their own retirement, encouraging your children to put money into a Lifetime ISA should be something to seriously consider.
You and your partner can gift £3,000 each, inheritance tax free, per tax year. If your children invest this money in a Lifetime ISA, it will:
- Reduce your estate’s value for inheritance tax purposes;
- Give them not just your gift of £3,000 which would otherwise have been taxed at 40%, but a bonus 25% on top.
What about your existing Cash or Stocks and Shares ISAs?
If Lifetime ISAs are so good, should you redirect the money you normally save into an ISA into the new Lifetime ISA (when it’s available)?
For the first £4,000 you save into an ISA each year, the answer could be yes, as long as the money is earmarked for:
- Your first property or,
- Your retirement (age 60+)
If the money you’re saving into an ISA is there to be accessed over the short term for any other reason, the answer is probably no. You should check with your financial adviser before making a decision or taking any action.
What’s still unknown!
The Lifetime ISA isn’t going to be available until the 6th April 2017. That’s a little while away and the Government is still working on the finer points, including:
- Exploring the possibility of ‘borrowing’ from your Lifetime ISA, and returning the money free of the 5% charge;
- The special circumstances under which you can access your money (including the bonus and without a charge), for example if you were diagnosed with a terminal illness.
Whilst Mr Osborne ended up leaving pensions alone in his 2016 Budget, and tax relief intact, is the introduction of a Lifetime ISA a nod in the direction of an ISA Pension future? Is the Chancellor gearing up to announce a flat rate of tax relief? Watch this space….
Will you or your children be taking out a Lifetime ISA? Let us know by adding a comment below.
† www.gov.uk; * www.gov.uk