money

Expat woes with the Lifetime ISA

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!

Government backed annuities

Every time there are reports in the media about the woefully low annuity rates or the recently implemented pension freedoms, I wonder why there aren’t more flexible or state-backed options for annuities. As much as the pension freedoms might have kickstarted a more flexible approach to retirement planning, annuities will still have a place in many people’s financial scenario planning because the security they offer is something many people will desire in their twilight years.

Given that the companies providing the annuities are effectively profit focused organisations, the fact they still offer these products means there must be money in it for them to do so. But if they’re basing their calculations of an annuity’s viability on historic mortality data, it’s no wonder that the returns they’re expecting will be lower as we’re all supposedly living longer these days. So in order to retain their operating margins, inevitably the value of annuities to consumers falls.

What I wonder though, is why the government doesn’t offer a state-backed annuity, accepting lower returns than the incumbent organisations but basing those returns over a longer period. In doing so , they’d be able to offer individuals higher rates and make the option of an annuity a much more attractive proposition. And because the government has the comparative luxury of basing their calculations over a longer time frame, it could result in a long term revenue source for a future government. 

Maybe the concept is too alien for any government, thinking about future generations – and future governments – but as a concept, I think this could definitely be a good move for both individual and the broader country finances.

The 8th wonder of the world

piggybankI read with interest the other day that according to Albert Einstein, the 8th wonder of the world isn’t any natural or man-made structure, but is in fact, compound interest. Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” And I happen to like this idea, even if I may bore my friends talking about it!

My general interest in the topic extends from a vested interest in pensions, ISAs and other saving mechanisms, but more importantly, now I have a son to consider it bears thinking about in terms of helping prepare for his future.

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