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Danby Bloch: In praise of the Lifetime Isa

The young, first-time buyers and the self-employed could all have compelling reasons to invest in a Lifetime Isa

When it comes to the newly-launched Lifetime Isa, advisers should be looking at their client bank and asking: who should invest in it?

In practice, there are many for whom it is a really attractive product but there are also a large number who should avoid it. And because of the age limit on who is allowed to start investing in a Lifetime Isa, there is a degree of urgency about the whole issue.

The key point about it is that the investor gets a 25 per cent uplift in their investment (equivalent to 20 per cent basic rate tax relief) while the proceeds are free of tax and penalties as long as they are used for a qualifying purpose, be that for a first time main residence purchase or drawn after the age of 60.

The combination of tax relief on inputs and freedom from tax on outputs is rare and valuable for mainstream investments. It is mostly confined to higher risk investments, such as VCTs and EISs.

Disappointingly, £4,000 is the maximum annual input that can benefit from the Government bonus of up to £1,000. But that is still a worthwhile amount, especially over a period of several years.

“When it comes to the newly-launched Lifetime Isa, advisers should be looking at their client bank and asking: who should invest in it?”

Don’t wait until its too late

The aforementioned sense of urgency arises because the Lifetime Isa can only be started by investors between the ages of 18 and 40. That said, anyone who has started investing in one can continue contributing, and receiving the annual 25 per cent Government uplift on inputs, until they reach the age of 50.

So advisers should be trawling through their clients to find those who fall into this age range. And remember that even if the qualifying individual does not have the means to invest, they could have a more prosperous family member that might be willing to help them.

Focus, in particular, on anyone due to reach their 40th birthday in the next few months. Without starting a Lifetime Isa, they could be missing out on a valuable opportunity to benefit from £10,000 of Government subsidy over the next 10 years.

Prop up a property play

So what exactly is the purpose of the Lifetime Isa? The plan has two distinctly different functions.

Anyone likely to buy a first property that falls within the £450,000 cost limit should seriously consider investing in one if they can. For most people in this situation, the timescale between starting the plan and buying the property is probably less than about five or six years. Where that is the case, it would normally be prudent to stick with cash or near cash investments. The bulk of the return on the Lifetime Isa over such short periods will be derived form the Government top-up rather than the intrinsic growth in the investment.

The other main market is retirement planning. The Lifetime Isa has all the characteristics of a pension fund but the combination of tax relief on the investment and freedom from tax on the drawing after age 60 can make it superior to a registered pension for some people. A good example would be a self-employed person who does not therefore benefit from matching employer contributions or the effective National Insurance contribution relief from salary sacrifice.

A self-employed person who gets basic rate tax relief on a £5,000 pension contribution will invest a net £4,000 but have a £5,000 fund available to draw (ignoring all growth). On that, they will get £1,250 tax free and pay tax at 20 per cent (£750) on the balance of £3,750, leaving a net £4,250.

In contrast, by investing the same amount into a Lifetime Isa, the £5,000 fund will be unaffected by tax, making them £750 better off: a difference of 15 per cent of the fund. The unfortunate investor who gets basic rate tax relief on the pension contribution but ends up paying higher rate tax on the benefit would be even better off, saving twice as much tax: £1,500, or 30 per cent of the fund.

Avoid the sting in the tail

Bear in mind, though, that the penalties on early withdrawal are punitive.

Yes, it is true there are a lot of people who probably should not invest in the Lifetime Isa – at least not at the expense of making pension contributions that their employer will top up. Likewise, it is not great for employees who can salary sacrifice and get their employer to invest the NIC saving into the pension.

But there should be a considerable market for this product among the self-employed, employees who would just get basic rate tax relief and anyone who cannot contribute enough to their pension.

And if a qualifying client wants to boost the value of their Isa fund, transferring £4,000 into a Lifetime Isa is quite a neat trick to pick up an extra £1,000 Government uplift (although it would make withdrawing the transferred funds before age 60 an expensive move).

It is a pity that very few providers have launched the product as yet. The Government did not give much time to prepare for the April start and it is relatively complicated to administer, in many people’s views. But it should be worth the trouble.

Danby Bloch is chairman at Helm Godfrey

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Absolutely right Danby, we should be cheering the arrival of the LISA – it is one of the few ‘innovations’ that tries to get younger generations thinking about saving and links it to a very relevant outcome.

  2. Good read – and great to see someone supporting this new investment. We simply have to do more to get younger people engaged with putting money aside for their future and for many of them, “pension” is a tarnished concept.

  3. Better to stop Govt. ‘mucking about’ with pensions and get some consistency and confidence back. Targeting the ‘younger’ generation, most of whom are renting, have children to cater for or have so much money that the LISA is too much trouble to bother with, is a nonsense and the LISA will never go anywhere. IMHO.

  4. Michael Johnson 3rd May 2017 at 5:04 pm

    The concerns that Danby raises, including people missing out on employer contributions, are addressed in a paper published yesterday (May 2): “A Pensions and Savings Manifesto”

    http://www.cps.org.uk/files/reports/original/170428113923-APensionsandSavingsManifesto.pdf

  5. @Michael Johnson, Author of the LISA.
    Thank you for the opportunity to read the paper. It shows that Govt., with their ‘safe’ unaffordable, DB Scheme Pensions, are focusing, on retrieving the benefits, from their citizens, associated with pension tax relief, (Which makes pension contributions the best thing since sliced bread). Increasing the access age to 60 in 2028 is ridiculous and is just another idea to reduce the attractiveness of Private Pensions. A statement from the ONS: – “A person’s risk of stroke doubles every decade after the age of 55.” “Bonus” is better than “Tax relief” it says, because people do not understand ‘Tax relief’. This may be correct and IFA’s like myself are trying to change this because ‘Bonus’ for most people is associated with Banks, Company Directors and Gambling Machines. I could go on but enough is enough.
    My thoughts on what Govt should do: a) Flat rate tax relief on pensions b) merge Income tax and NIC c) remove the AA and LTA d) Increase CGT to 20%. 40% and 45% e) Increase the ubiquitous age 75 associated with pensions to 10 years above the State pension Age f) increase the Personal Allowance; Basic to £15,600 pa (40 x Living wage of £7.50 x 52), High Rate to £52,000 pa, reduce the Higher rate to £122,000 pa, g) have animated storyboards to explain tax relief to the masses, h) cease all Govt DB schemes. That’s it for now.

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