Budget 2016 (Pensions)
“Pensions – no news is good news”.
LISA – Lifetime ISA
The Chancellor plans to introduce the Lifetime ISA in April 2017. This is an excellent savings opportunity for youngsters but not something that should be seen to replace more traditional pension saving. Higher rate tax payers are still able to enjoy 40% tax relief on pension savings up to £40,000. Young high rate tax payers will indeed be able to use both and add up to £45,000 per annum to their retirement funds. To accommodate the LISA, the Chancellor plans to increase the annual ISA allowance from £15,240 to £20,000 in April 2017.
How It Works
The lifetime ISA is only available to under 40s and plans to include a 25% top up at the end of each tax year. However paying into a LISA is maximised at £4,000 per annum becoming £5,000 with the Government top up. Savers will stop receiving the top up aged 50. Investors will be able to put their money into either cash or stocks and shares ISA.
Withdrawal will only be available tax free aged 60, but in order to help first time buyers the fund can be accessed at any point tax free to be used as a deposit. Anyone already saving in a help to buy ISA will be able to transfer their funds into the new LISA with the less generous help to buy ISA set to end in November 2019.
Early withdrawal is allowed however the Government bonus plus any growth on the fund will be lost. There is also a 5% tax charge applied to the amount withdrawn.
For those keen to save for retirement, it raises the question whether or not it would be better to save through a LISA or a more traditional pension. Money put into a traditional pension is tax free, however it’s taxed when withdrawn. Money put into a LISA is already taxed but free of all tax when taken out.
In yesterday’s budget, George Osbourne once again increased the personal allowance of both low and high rate tax payers. From April 2017, individuals will be able to earn £11,500 before they start to pay tax. In a boost to high earners the threshold at which 40p tax is payed will be increased to £45,000.
If you have any questions regarding any of the above or would just like to review your current situation then please do not hesitate to get in touch and arrange a free consultation.