Mouthy Money’s Your Questions Answered panellist Thomas Skinner, financial planning director and founder of Barnaby Cecil, answers a reader’s question on what to do with leftover Lifetime ISA after purchasing a house.
Question: We’ve recently bought a house and have leftover Lifetime ISAs with nothing in them. We’d like to save a small amount of money each month for retirement (both in our early 30s). Is it better to use our ISAs or contribute extra to our pensions?
I understand pensions are generous with relief, but won’t I just get hit with that tax when I come to use it later in life? The Lifetime ISA (LISA) seems attractive because there’s no tax implications in the future and it has a bonus which is better than tax relief.
Answer: Congratulations on the recent purchase of your property. The LISA and pension both have tax advantages and create an interesting set of options for savers.
LISA investments are made from net income, after income tax has been paid, and receive a 25% bonus. The limit is £4,000 per annum (with £1,000 bonus applied) but, significantly, you cannot pay into a LISA after you turn 50.
And so, while they provide an attractive vehicle in which to save, your 50s could be the point in your career where you are able to make very substantial savings into your retirement.
For that reason, pensions are still a very attractive vehicle. Particularly if you are a higher rate taxpayer and currently pay tax at 40-45%.
Or, if you earn above £100,000 and are caught by the loss of your personal allowance and wish to dip below this level, you could perhaps use a salary sacrifice scheme at work. This is because the payments receive tax relief when made and then benefit from tax-free growth.
When you access your pension, which will be from 57 from 2028, you can draw 25% tax free, and the remaining amount is taxed at your marginal income rate at the time. Which could be a rate much lower than your current working tax rate.
Seek independent financial advice before making any final decision but you could always consider using a combination of ISA, LISA and pension to create a portfolio of retirement accounts. Each has their own advantages and could create a flexible retirement solution.
Thomas Skinner, financial planning director and founder of Barnaby Cecil