Get to Know Lifetime ISAs & Pensions

Lifetime ISAs: Are They an Essential Way to Supplement Your Pension?

Pensions are an essential part of the financial lives of many people. However, as life expectancy increases & retirement age decreases, pensions can become inadequate for some people. Lifetime ISAs were introduced to address this issue. This article will discuss what lifetime ISAs are, how they work & their connection with pensions.

Get to Know Lifetime ISAs and Pensions

Get to Know Lifetime ISAs & Pensions

What’s A Lifetime ISA?

Lifetime ISAs are a new type of savings vehicle that gives people a way to save for their future.

Lifetime ISA contributions are tax-free and, when they mature at age 60 or before the cut-off age, the money is not taxed as retirement income. Still, it can be withdrawn without incurring any exit fees or penalties. 

People who want to invest in a lifetime ISA should also think about how it will affect their existing pension arrangements.

One important thing to consider is whether your pension provider offers an Enhanced Employee Pension (a workplace pension scheme).

If so, you may want to take this opportunity before switching entirely to the Lifetime ISA system.

ISAs Vs Pensions

ISAs Vs Pensions 

ISAs1 are different from pensions in crucial ways. Annuities can be set up using the workplace, for example, through your employer or via a contracted pension provider.

Pension contributions will usually be deducted automatically and paid on behalf of you by your employer – but they also often require regular contributions at specific intervals (e.g., annually).

Moreover,

Pension plans are also different because as you get older, your pension fund becomes larger.

ISAs work differently – they provide tax-free savings account for the holder. The only time ISA holders might need to pay any money into their Lifetime ISA is if they wish to withdraw funds before age 60.

How Do Lifetime ISA Works?

There are two types of Lifetime ISA2 available. If you’ve never had a pension before, the government will give you £25,000 to put in your Lifetime ISA.

These contributions are called “starter” funds, and they have an annual limit of £4000 per year with flexibility on how much is paid into each calendar month if under age 40.

Let me show you,

Suppose you already have a registered workplace pensions scheme or existing stakeholder.

In that case, the first 25% that their employer has paid can be transferred into the new Lifetime ISA wrapper (up to £3750) at any time free from income tax as well as being eligible for a Government bonus (£1000).

After this point, people can still transfer money from other pension pots, but there is a charge of 25% on any withdrawal where the individual has not reached 60.

How To Open A Lifetime Isa

How To Open A Lifetime Isa

ISAs can be opened through most banks, building societies and financial institutions.

You will need to have at least £1000 for this type of ISA account. If you are under 18, then a parent or guardian must fill in the application form on your behalf and provide their consent, but there is no minimum age limit if opening an ISA with another person as joint holders. 

How Much Can You Save?

A lifetime ISA is capped at £500,000 in total contributions.

The maximum amount you can save into a Lifetime ISA each year starts from when it’s opened and doesn’t change even if the annual allowance limit changes next year or later this week; the current contribution limit is £4000 per year (£1600 for those under age 40).

Now:

If you’re lucky enough to have been able to put away that much by the time your 60th birthday comes along (in 2020), then congratulations – all of these savings will be completely tax-free too!

However, unlike with other types of pension schemes, there are no limits on how long they need to stay invested, so as soon as you hit retirement and start withdrawing funds from your Lifetime ISA, you’ll be paying tax on the earnings at a rate of either 20% or 40%.

Lifetime ISA Rules

Lifetime ISA Rules

The lifetime ISA rules are straightforward, but there are a few things to keep in mind.

First, you’re only allowed one lifetime ISA per person. This means that if you already have a Help to Buy ISA or any other type of savings plan in place, then, unfortunately, your Lifetime ISA will be redundant and may not need to be opened at all – check with HMRC for confirmation on this.

Second, although it’s possible for those over age 60 who are no longer earning an income from work to open up the account without penalty (as they won’t be taxed), younger individuals who withdraw their capital before age 59½ will incur a 25% penalty.

The last thing worth mentioning is that there’s also the option of buying life insurance through providers such as Aviva Life Insurance, which can provide additional tax-free benefits as well.

Transfer Funds From Any Other Type of ISA into A LISA

While it’s possible to transfer funds from other types of ISA into a Lifetime ISA, you’re allowed only one contribution per year.

As a result, the best strategy is likely to be making maximum use of your yearly allowance in all the different types of accounts available – for example, by putting £20k each year into an Innovative Finance Individual Savings Account (IFISA).

You can also opt to withdraw and then redeposit up again any money that remains after five years as long as this isn’t yet withdrawn at age 60 or over.

Tax Relief

Tax Relief

Lifetime ISA contributions are not currently eligible for tax relief, but the government has pledged to extend it in the future.

Withdrawing Money

You see:

A Lifetime ISA is a savings account, not an investment product. That means you can withdraw your contributions at any time without penalties or withdrawal charges.

It’s important to bear in mind that if you don’t make the same amount of contribution each year, then the government won’t guarantee what proportion it will pay on maturity (currently 25%).

So, for example, with just one extra bond per month and no changes made to the other parameters, we could see as much as $506K after 30 years!

This makes sense because more money is being invested now, which means there’s more compound growth from reinvested returns than before.

Common Questions

Can I have a lifetime ISA and a pension?

Is a lifetime ISA a good idea for retirement?

Can you retire with lifetime ISA?

Can you use a lifetime ISA for a house and retirement?

In Conclusion

The Lifetime ISA is considered a good alternative to pension funds due to their flexibility, the ability for people who want to save but cannot afford it now to do so with tax benefits and possible bonuses.

Lifetime ISAs are available to everyone and offer some really good benefits, but it’s important to know that they do have limits on how much you can put in per year.

Lifetime ISA contributions differ from other types of savings option because there is no overall limit or upper age restriction, which means those who want their money working harder than ever before should take advantage.

Lifetime ISA helps individuals saving for retirement provide better security and stability with tax-free cash while also making sure we close the gap between the state pension and what people need to live on.

Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.
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