Lifetime ISAs – First Time Buyers & Retirement

Lifetime ISAs or ‘LISA’s.

There are bonuses available for first time buyers, but are they really advantageous for retirement saving?

If you are saving up to buy your first home you need to know about the new Lifetime ISA. They are also designed to encourage saving for retirement.

It is important to note that ‘consultation’ is ongoing regarding some aspects of the new LISA accounts, so be warned, the information below is subject to change!

What is the Lifetime ISA?

Good News For First Time Buyers

According to Homes & Property (21st November 2016), first-time buyers are paying an average of £15,000 more for a starter home than last year.

For example, two people, who have never owned any property before, could save £4,000 each a year for 3 years to buy their first home together:

 SavingsBonusTotals
Year 1£4,000£1,000£5,000
Year 2£4,000£1,000£5,000
Year 3£4,000£1,000£5,000
Total  £15,000

Total          £15,000.00 x 2 = £30,000 – £6,000 contribution received. This does not include any interest accrued which can be added to the figure.

LISAs – Important things to remember:

Help to Buy ISA’s (H2B) are still available until November 2019 if you are not eligible for a LISA. Generally, the LISA is better but there is no upper age limit for H2B.

LISA for Retirement Savings

If you are planning to use a LISA for Retirement savings, the advantages over existing pension plans are less clear.

For basic rate tax payers the bonus is effectively the same as the tax relief applied to pension contributions. For example, £80 from your net income into either a pension or a LISA results in £100 in your plan. For higher rate tax payers the pension plan is better as getting £100 into their pension only costs £60.

Depending on how much you earn, you can pay much more into a pension plan than a LISA but if you are already paying as much as you are allowed into a pension plan, a LISA may be a useful way to top up retirement benefits further.

When is a Pension Plan better than a Lifetime ISA?

  • Auto-enrolment means your employer (if you have one) has to match some of your contributions in a pension; they don’t in a LISA. This is a big advantage of pensions.
  • You may also get national insurance and salary sacrifice gains from pension saving through an employer that you wouldn’t get with a LISA.
  • Pension contributions don’t have an impact on your benefit entitlement but LISA savings may.

When is a Lifetime ISA better than a pension?

Saving for your First Home

The Government’s idea behind these accounts is to encourage young people to begin to think about saving for retirement at the same time as they think about buying their first home as far too many people leave it until too late to begin saving for a pension. This seems like a good idea, although each is equally important, they generally require different investment strategies

Short term savings over a 3-5 year period in order to accumulate a deposit for property will generally be best held in cash funds. Most Banks and Building Societies, although not all, are likely to offer cash LISA accounts and it will simply be a question of shopping around for the best rates. It may be possible to transfer LISAs if better rates become available after an initial account has been set up.

Saving for Retirement

LISAs are designed to hold longer term retirement savings for a minimum of 10 years and over this period of time, a cash fund is much less likely to be appropriate. With interest rates as low as they are, and unlikely to rise much in the foreseeable future, cash funds over the longer term run the very real risk of their purchasing power being eroded by inflation. We need to look at other asset classes for retirement planning, where there is real potential for capital growth and the prospect of a pension we can actually afford to live on!

Lifetime ISAs  – Tailored Advice for YOUR situation

This article does not cover all aspects of these new accounts and the implications for everyone. Everyone is in a different situation and needs different advice.

At HGH Wealth we are here to tailor that advice for you so you can understand if a LISA really is likely to be advantageous as part of your retirement planning or whether your existing, or a new pension plan would be better.

Contact us

Call us on 01904 655202 to make an appointment to come in and chat to Nick Lawson about your own situation and establish the best course of action for yourself. Alternatively email nick.lawson@hghwealth.co.uk. We look forward to speaking to you soon.