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Should you LISA or ISA?

During the most recent shake up to the UK savings market, it was announced that the Lifetime Individual Savings Account (LISA) would launch on Thursday 6 April 2017, to sit alongside the already heavily populated savings options available to individuals.

Previous and current Governments have tried and sometimes failed to incentivise their electorate to build up a nest egg for a rainy day, removing the burden away from the state benefits system. Whether this be…

• Personal equity plan (PEP)
• Tax exempt special savings account (TESSA)
• Personal Pensions
• Stakeholder Pension
• Individual Savings Account (ISA)
• Junior ISA
• Help to Buy ISA
• Workplace Pension, that most employees will now have been entered into automatically through their employer

And now we see the introduction of the LISA.  With differing limits to what can be paid into such schemes and differing investment options for the monies held within them, what should have been a simple choice for people is never more confusing.

However, it is the Lifetime ISA that has divided opinion the most, with only four providers (at the time of writing) coming to the market with their own product in readiness for the April launch.  So will this be yet another ’white elephant’ and end up on the savings scrap heap, or could this be the first of significant changes to the way people save for the short and long term and perhaps even be the end of pensions as we know it?

 

For starters, if you will reach the age of 40 before Thursday 6 April 2017, then you do not need to read on as you won’t be eligible for this new LISA product.  Only UK based individuals aged 18 and over but under the age of 40 can apply.

 

The LISA is designed for two specific purposes, the first is to help people get on the housing ladder, as the accumulated sum can be used towards purchasing a residential property.  The second is to accumulate a sum to be used for an individual’s retirement from age 60.  With the maximum sum being limited to £4,000.00 per annum (in the 2017/18 financial year a further £16,000 can be saved into a normal ISA alongside investing into a LISA) perhaps the most attractive feature compared to a normal ISA is that the Government will contribute a 25% bonus, up to a maximum of £1,000 on all contributions made up to the age of 50; and that’s before any interest or growth is added, which will accumulate tax free.

All sounds good, however the devil is in the detail.  Should you withdraw the money before age 60, and the accumulated funds being withdrawn are not being used to purchase your home, then you will pay a 25% penalty on the amount withdrawn; that’s effectively removing the bonus paid. There will also be an additional charge of 6.25% on the part withdrawn which is classed as the payment ’you put in’, and not any accumulated interest or growth.  Regarding the latter, the amount of interest or growth will be determined by whether you choose to invest in cash, stocks or shares.  So much for making savings simple!!

What is clear with all these savings options is that more than ever individuals will need to seek independent advice as to which savings option is best for them.  Our team of advisers at David Allen Financial Services will complete a comprehensive review of your existing and future savings plans and tailor a solution that is best for you, contact us today on 01228 711881.

Posted: March 21st, 2017

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