Government Boost to Retirement Savings

Written by Amy MacKinnon, BA (Hons), FPFS – Financial Planner 

Most individuals will have a pension, however, a lot of people saving for retirement may not have considered the use of a Lifetime ISA (LISA) alongside their pension to increase their savings.

 Within a pension, an individual is able to contribute the lesser of their relevant UK earnings and £40,000 per annum. Rental and dividend income are not classified as relevant UK earnings.  

 

 A LISA enables the individuals to contribute a further £4,000 and receive a £1,000 bonus, equivalent to tax relief of 20%, with the added bonus of being able to withdraw any amount from the LISA tax free after reaching 60 years old.  

 

The below looks at the differences between contributing to a LISA via a pension.  

  Pension  Lifetime ISA 
Contribution 
£4,000

Pre-tax income
 
£4,000
Post-tax income 
Tax Relief/Bonus  £1,000 £1,000

Total paid into account
 

£5,000

£5,000
Contributions  Exempt 
Exempt
(if Basic Taxpayer)

Whilst Invested
 

Exempt
 

Exempt
 
Withdrawals 
Taxable
(25% tax free)
 
Exempt 

 

When a personal contribution is made to a pension you will receive tax relief at your marginal rate, which, if you are a basic rate taxpayer, is 20%. The above table shows the tax relief/bonus that would be rewards for the same level of contribution to the different wrappers.  

 

Although the overall contributions are equal, there are some key differences, a pension can often be referred to as EET (Exempt, Exempt, Taxed). The contributions are Exempt as they receive tax relief, investment growth of assets within a registered pension scheme is Exempt from income and capital gains tax, however, in addition to the 25% a member can take tax free from their pension the remaining withdrawals are taxable at their marginal rate of income when withdrawals are deducted. 

 

In comparison a LISA can be referred to as EEE (Exempt, Exempt, Exempt). Although an individual would have paid tax on their income before paying the contribution, the bonus of 25% would equate to the tax paid if a basic rate taxpayer, Exempt.  No tax is paid within the wrapper, Exempt, and after the age of 60 withdrawals can be made completely tax free with no penalty again completely Exempt of tax.   

 

Use of LISAs to increase retirement savings
Although LISAs have an annual contribution limit of £4,000, they could be useful to individual’s that are not able to contribute more than £3,600 to a pension due to not having any UK Relevant earnings or to individuals who are limited to the amount they can contribute as a result of the tapered annual allowance. To be eligible to open a LISA an individual must be aged between 18 – 40 and be a UK resident.  

 

Subscribers will receive a maximum bonus of £1,000 per annum payable between the ages of 18 – 50 (33 years) and therefore an additional £33,000 could be saved for retirement.  

 

There are two types of LISA’s, cash and stocks and shares. If the money is held within a cash LISA the funds will benefit from the accounts interest rate, whereas if the LISA is invested within a stocks and shares LISA the account can also potentially benefit from investment growth. For Example, if an individual were to subscribe £4,000 per annum to a LISA from 18 until 50 the individual would have contributed £132,000 and received a total maximum bonus of £33,000. 

 

If the funds were invested over the whole period and received an average growth rate of 4% the fund would be projected to be worth £344,290. All of which could be accessed completely tax free after the age of 60. It is important to note that contributions to a LISA form part of your total ISA allowance of £20,000 for the tax year 2019/20. In addition, a LISA will form part of your estate on death and can be taken to pay creditors in bankruptcy.

 

 

 by Amy MacKinnon  

 

If you want help taking charge of your retirement and your future security get in touch with us today at enquiries@gpfm.co.uk or call 01992 500 261 now and see how we can help address your financial future. 

 This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested. 

 

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