Is the new 'ISA' better than a Pension

The Government’s latest savings product, the Lifetime ISA, is launching in April 2017. The ‘LISA’, an ISA that works in much the same way as a pension, is one of the most controversial financial vehicles to be launched in decades.

Critics claim ordinary savers will be confused, stung by hidden exit penalties and likely to give up valuable employer pension contributions.  The Lisa is a long term saving product, locking up cash until the saver buys their first home or takes the pot as a pension.  Any contributions are boosted by a government bonus, but unlike a pension, it is not eligible for employer contributions.

For first time buyers, the Lisa is better than the Help to Buy ISA, which is being phased out by 2019 and has been beset by problems.  For the self-employed, who do not get workplace pensions, there is obvious appeal, but with the standard cash or stocks and shares ISA allowance rising to £20,000 as the Lisa launches, is it worth other groups investing significant sums?

How it works

To be eligible you must be over 18 and under 40.  Contributions receive a 25% government bonus on any sum up to £4,000 per year, making a total maximum annual investment of £5,000.  This continues until 50.  After this age, no further contributions can be made and the Lisa pot will only grow because of investment returns.  As with all Isa’s, contributions are made out of post-tax income, but returns and withdrawals are tax free.

Withdrawals are penalty free to buy a first property, at age 60, or because of terminal illness.  Anyone wanting their money early for any other reason will pay a 25% penalty.  This may look like the Treasury simply taking back the bonus if paid, but that is not the case.  The 25% penalty comes off the entire value of your savings, including your contribution and any investment growth.

Savers can make contributions into either a cash or stocks and shares Lisa.  The choice depends on how much risk you want to take and what your goal is.  If you are funding retirement, a strategy focussed on investing in stock markets is probably most appropriate, but for a short term boost to your house deposit, a safer cash account might be better.

John BaxterComment