Lifetime ISA, or Pension?
With the autumn statement released recently, it’s easy to overlook the incoming changes announced in 2016 that are due to take effect soon. The Lifetime ISA for example, caused a stir when announced, and seemed to offer a generous bonus to those who were saving for a house, or for their retirement.
However, since that time confidence in this new saving method has taken a bit of a beating, as some suggest it may not be as beneficial as it seems.
The Nationwide has announced it will be boycotting the product, claiming that it is too complicated. Others, like Standard Life and Fidelity, will launch a Lisa, but not in time for the April start date. Nevertheless one provider – Hargreaves Lansdown – has announced it will launch one by 6 April 2017. That will give some savers the chance to earn up to £32,000 in government bonuses.
But critics are warning not just that the product is complex, but that it could leave some investors worse off. And should you want your money back at any stage, you could pay dearly.
Could I use a Lisa instead of a pension?
Theoretically yes, but this is not a choice to be made lightly, and there are various possible pitfalls. For example, anyone who is paying into a workplace pension can expect contributions to be made by an employer, which are likely to be more valuable than the annual Lisa bonus.
Some of course, may not be affected by losing those contributions, such as self-employed people or those who have secured the maximum employer contribution on their workplace pension and want to save more.
“In most other situations, a pension will make more sense,”
says Tom McPhail, retirement specialist with Hargreaves Lansdown.
“This is particularly relevant for anyone who can join a workplace pension and benefit from employer contributions.”
There could also be a difference in the age at which you are entitled to withdraw money from a pension and a Lisa. Those currently under 40 – and therefore eligible for a Lisa – will need to be at least 57 before they are able to take money from their pension. Those with Lisas will not be able to withdraw money penalty-free until the age of 60.
That said, the required age before withdrawing from a pension may yet rise further, and may even end up matching the age requirements of the Lisa.
What if I need the money sooner?
You can only withdraw money penalty-free if you are buying your first home, you are over 60, or if you have a terminal illness. All other withdrawals will incur an apparently hefty 25% exit charge. This breaks down as 20% to recover the bonus, plus an additional 5%. That 5% is partly to make up for the investment growth on the bonus itself.
Nevertheless one investment firm has calculated that the charge could mean an investor losing around 45% of the growth in the value of the Lisa, assuming he or she had it for 10 years, and it were to grow by 4% a year.
“It is disappointing to see the government pushing ahead with an exit fee that looks overly punitive if people unexpectedly need access to their savings,”
said Tom Selby, an analyst with AJ Bell.
Lisa Caplan, head of financial advice at Nutmeg, warns that some savers could actually lose money.
“If you invest £4,000, you get a 25% top up from the government to make £5,000. If you withdraw early, you will be penalised by 25% which is £1,250, so you will be left with £3,750, 6.5% less than your initial investment.”
Of course these numbers only take effect if you withdraw the money, so if you keep it saved and don’t succumb to the temptation of removing it to help through tough times, the withdrawal penalty is moot. Especially when compared to a pension, which you generally can’t withdraw at all before 55. Essentially, the Lisa gives you flexibility, at a cost.
As always, the best thing to do is sit down with one of our experienced financial advisors and review your unique personal situation. Small details can make big differences, and whether that’s a good difference or a bad one, you probably want to know about it.
Arrange a meeting today. It could make a big difference tomorrow.