The Lifetime ISA – and your retirement fund.

The Lifetime ISA – and your retirement fund.

The Government's new flexible Lifetime ISA, unveiled in the Budget, could be very good news for savers, would-be homebuyers and those taking a long term view of retirement Among other things, it will offer a tax-free boost of up to £1,000 a year for your retirement pot.

What is a Lifetime Isa?

The Lifetime ISA is a savings account that allows you to save for a property or retirement without paying tax on the interest you earn. You can save as little or as much as you want each month, up to £4,000 a year. It also offers a government bonus to boost your savings - equal to 25% of everything you save. So if you put in the maximum each year, you will receive a £1,000 bonus every 12 months from the government.

It will only be available for those under the age of 40 in April 2017: individuals will be able to open a Lifetime ISA from the age of 18 until they turn 40, and keep contributing to it until they reach 50. So you could end up with £32,000 worth of bonuses – if you were able to pay in the maximum £128,000 over 32 years.

It has a disadvantage in that is that your money is locked up until you are 60, unlike a conventional ISA which you can dip into at any time. But keeping your savings safe from temptation may actually be a benefit if you want to use it to help build your pension pot.

lifetime isa pension fundGood for retirement?

The government cash is the equivalent of a 25% interest rate on your savings, which is reason enough to look at what the Lifetime ISA can do for you. You’ll also get interest and investment growth. Even more important, you’ll enjoy the tax benefits of a conventional ISA. After your 60th birthday you can take out all your savings tax-free, which is more attractive than most pension schemes which only let you take 25% of your pension pot tax-free.

It could be a major help in preparing for retirement. If a 25 year old took out a Lifetime ISA and paid in £4,000 a year, with 5% annual growth and annual £1,000 bonus it should add up to a tax-free pot worth more than £416,000 at the age of 60.

Too good to be true?

The Lifetime ISA could be a good deal for those who are self-employed and who don’t benefit from employer contributions into a workplace pension. However, it could be less attractive than an ordinary pension where you save from untaxed income - the Government pays tax relief at your 20 per cent, 40 per cent or 45 per cent income tax rate.

You could, of course, do both, and pay the maximum into your LISA while enjoying steady growth from your workplace pension. If you have a personal pension as well, a LISA could be a simple way to circumvent the new restrictions on lifetime pension contributions which would otherwise put a lid on your retirement pot.

Is it good for you?

Whether or not the Lifetime ISA is right for you depends on your circumstances. It may be useful if you want to finish work at state retirement age, bbut not if you want to retire early - You may be able to get at your cash before you hit 60, but there will be substantial penalties for doing so, with a loss of bonuses and a 5% charge.

If you're unsure about how to save for your retirement, contact our pension team today.

'Click here to read our recent blog "Make the Most of Your Personal Savings Allowance."

The Financial Conduct Authority does not regulate taxation and trust advice.

Levels and bases of reliefs from taxation are subject to change.

The value of investments can go down as well as up and you may not get back the amount invested.