ISA: Lifetime accounts to surpass pensions as the ‘best retirement product’ – full details

Martin Lewis advises savers on Lifetime ISA penalties

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ISA accounts offer a huge range of tax incentives for savers but LISAs specifically also provide a number of other benefits on top of this. LISA holders can receive a Government bonus for home purchases or to boost retirement funding but new research shows many may be missing out on this.

Hargreaves Lansdown (HL) recently surveyed 2,000 people in April 2021.

The results from this survey showed:

  • Two in five people (43 percent) have never heard of the Lifetime ISA. Awareness is higher among younger people, but still only three in five people aged 18-34 have heard of it.
  • Only one in five people are confident they know exactly what the LISA is.
  • People aged 35-39 are more likely to have a LISA than those aged 18-35.
  • One in 20 people don’t know whether they have a LISA or not.

Nathan Long, a senior analyst at HL, commented on this and called for “geriatric millennials” to get a move on before it’s too late.

He said: “If you’re about to turn 40, time is running out. Geriatric millennials only have until the day before their 40th birthday to open a Lifetime ISA.

“And it’s a vital step to protect your access to what can be the most tax-efficient way to save for retirement.

“At the moment, LISAs and pensions jostle for the title of ‘best retirement product’, so your circumstances will dictate whether you opt for a pension, a LISA, or a bit of both.

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“But if pension rules change in the way that most experts expect, it puts LISAs firmly in top spot.

“There remains a need for the Government to recover the cost of Covid and rumours continue to swirl about the fate of pension tax relief.

“If there were a change, the likely option is a move from offering relief at your highest marginal rate, to a flat rate of relief.

“It’s expected this would be somewhere around 25 or 30 percent. If it’s anything below 35 percent, then the LISA will become the most tax-efficient option for all taxpayers. You’ll still need to factor in any employer contributions from your workplace pension, but once this is exhausted, the next £4,000 should go into your LISA.”

HL detailed as a “rough rule of thumb”, if a person is getting employer contributions from a workplace pension, that should be their “first port of call” for retirement savings.

However, once these contributions have been exhausted, meaning workers won’t get anymore from their employer if they continue to pay, the next £4,000 of contributions each year should go into a LISA (for basic rate taxpayers.)

This is because the tax relief going in is the same, but a LISA offers tax-free income at the end.

For higher rate taxpayers, they’ll “usually be better off” by continuing to pay into a pension because the extra tax relief offsets the tax on pension income.

Self-employed workers should also “start with the LISA” as they will not get any employer contributions to a pension.

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