Is the Lifetime ISA More Tax Efficient Than the Workplace Pension?
Manchester, April 6, 2016 (Newswire.com) - In his latest budget, Chancellor George Osborne announced the arrival of the lifetime ISA for people aged 18-40. The ISA is designed to help young people put money away for their first property, or to save for their retirement.
Billed as a solution to the issues with pensions, the scheme will see the Government matching 25% of payments over a 12-month period paid into the ISA up to a maximum of £4,000. Assuming that someone opens the account when they turn 18 and contribute the maximum per year until they are 40, this will see the Government paying a total of £32,000. Add this to the accumulated £128,000 and you’re looking at a pretty decent pension pot.
On top of the £32,000 bonus payment from the Government, provided you follow their strict rules – more on that later, you will also receive interest / investment growth on top of that. If the ISA earns on average 5% annual growth over the life of the ISA, you could be looking at well over £400,000 by the time you are 60.
There are rules attached to the scheme that could provide a deal breaker for some. The ISA’s main aim is to help people save for their first home. If you take money out for any other reason before your 60th, you will be subject to a 5% penalty fee and the loss of the Government bonus.
Employer Contributions
Steven Cameron of Aegon UK, fears that the scheme could cause many under 40 to discard their workplace pension scheme in favour of the lifetime ISA. He explains that a workplace pension is still the most attractive option for people due to the Government tax relief and employer contributions.
For higher rate taxpayers, the 40 or 45% tax relief on the personal pension contributions comfortably beats the 25% relief on the lifetime ISA. Another benefit of the workplace pension is the annual amount you can contribute, i.e. £40,000 opposed to the £4,000 limit on a lifetime ISA (£5,000 with the Government bonus).
If you were to compare the interest / growth on both schemes, with their maximum annual limits being reached over a 20-year period, the lifetime ISA would give you £4,000 extra, whereas the workplace pension would give you £40,000.
Unfair Comparisons
While these are unfair comparisons, it’s safe to say that the workplace pension is a lot more attractive when you take into account the higher annual limits and employer contributions.
Our advice, why choose? A workplace pension and lifetime ISA don’t have to be mutually exclusive, if you’re planning for the future it may be worth taking advantage of the lifetime ISA with Government bonus alongside the workplace pension to ensure you are able to enjoy your retirement with financial freedom.
If you would like to know more about the different pension schemes and the best way to invest for your future, give Pomegranate Consulting a call on 0161 974 0735.