Potential pitfalls of the Lifetime Isa – Royal London
By Kirsten Hastings, 14 Jun 16
To be introduced in the UK in April 2017, the Lifetime Isa (Lisa) is intended to incentivise people to save for their first home, their retirement, or both. But research published by the independent Pensions Policy Institute (PPI), sponsored by Royal London, compares the tax-free savings scheme with its international counterparts and highlights some challenges that may arise.
Announced in the March 2016 budget, the Lifetime Isa can be used to save for a first house, for retirement, or for both.
It is open to anyone under the age of 40. Savers will be eligible to receive 25% matching payments from the state, up to a maximum value of £1,000 per year, until they turn 50.
Lisa savers are permitted to withdraw funds, tax free, to purchase their first house up to the value of £450,000. Withdrawals are also tax free after the age of 60.
Any money taken out that fails to meet the above criteria will incur a 5% tax change and any government contribution is lost.
For private pensions, contributions and returns receive tax relief and withdrawals made after the age of 55 are taxed at marginal rates – with 25% of the pension fund tax free.
This means that standard UK pensions are Exempt – Exempt – Taxed (EET).
The Lisa operates differently in the sense that it is treated similarly to non-pension contribution savings and tax advantaged savings vehicles – such as Isas.
While the Lisa is described as a retirement savings vehicle it will be Taxed – Exempt – Exempt (TEE).
According to PPI, though the matching contributions from government provide the equivalent of basic rate tax relief on contributions up to £4,000 per annum, the “T” could be considered a small “t”.
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