So we’ve recently had the budget from George Osborne and amongst other things, he announced the Lifetime ISA. On the surface of it, the Lifetime ISA seems like an attractive proposition. And for many, it will be.
Effective 25% profit (interest) guaranteed from the government on up to £4,000 of annual investment, until a person reaches the age of 50 appears very attractive. And that’s before any natural growth on where the ISA is invested, until the age of 60 when it can typically be accessed.
And this is where Osborne has been crafty, in my opinion. Dangling that 25% carrot in front of many almost seems too good to be true. In many cases, it will make sense to take advantage of the Lifetime ISA – but is this going to be at the expense of pension saving?
The key difference between a pension and a Lifetime ISA is when tax is paid. So, with a pension, the money we put in to it now is tax free and then we get taxed when we take it out in retirement, often at a more favourable tax rate.
With a Lifetime ISA, the money that goes in has already been taxed up front. This in itself is a shrewd move by Osborne, because in a single swipe, he’s potentially reducing the immediate burden of pension tax relief whilst also securing tax revenues from future chancellor’s budgets.
However, for many, retirement – at whatever age it comes – may include a move to a sunnier climate, retiring overseas and joining an expat community of like minded folk. And this is the issue I have with the Lifetime ISA.
Because tax has already been paid when the money enters the ISA, it should be tax free when it comes out. But this isn’t the case for expats. ISA’s lose their tax free status for those permanently living overseas, so in effect, a Lifetime ISA will result in money being taxed twice.
This isn’t the same case for a pension though. Putting money into a pension now, benefitting from tax relief at a potentially higher rate and then paying tax on the money coming out, regardless of where you are in the world – may arguably be a better home for retirement investment, if retiring overseas is even remotely being considered.
This isn’t intended as financial advice, it’s just my take on the Lifetime ISA – so please carry out your own research before making any investment decisions!