LIFETIME ISA; NUMBER CRUNCHING
April 15th, 2016
The Lifetime ISA (LISA) was one of the surprises of last week’s Budget. But as a quasi-pension substitute, how good is it?
This Bulletin looks at how the LISA works as an alternative to pension provision, the unspoken role for which it was clearly designed.
First off, it is worth noting that 25% government bonus is not quite the same as basic rate relief:
- The bonus will be paid at the end of the tax year and there is no indication that monthly interim claims will be possible, unlike the way pension relief at source (PRAS) operates. How this will work in the real world remains to be seen – it is hard to envisage the LISA bonus arriving on 5 April for a payment made that day. So there may be an extra delay (remember contracting out rebates?).
In theory this will mean that for the same outlay, a LISA will produce a marginally smaller fund than a pension because part of the investment will be deferred, whereas PRAS is either provided instantly or with a delay of no more than about eight weeks.
- The government bonus stops at age 50, ten years before LISA is generally accessible without penalty, other than for first home purchase (or “other specific life events”, as yet undefined).
- Contributions are personal As with existing ISAs, this would probably mean that a subscription paid by an employer can be accepted, provided the employer confirms that the payment will be treated as a relevant payment to an employee for the purposes of the PAYE Regulations and a payment of earnings for the purposes of Class 1 NIC (para 6.7 ISA Guidance Notes).
For comparison purposes, let us look various tax rates initially and at age 60, with four situations:
- A £1,000 contribution to a LISA, made before age 50 and attracting a £250 bonus
- A £1,000 net contribution to a personal pension (PP) made directly by an individual, equivalent to £1,250 gross for a basic rate taxpayer and £1,666.67 for a higher rate taxpayer.
- A salary sacrifice of £1,000 net income (allowing for income tax and employee NICs) funding a PP with no employer’s NIC boost.
- A salary sacrifice of £1,000 net income (allowing for income tax and employee NICs) funding a PP with full (13.8%) employer’s NIC boost.
To keep matters simple, all growth is ignored (although the LISA would produce marginally less than an PP, as explained above). The pension is valued as if the entire fund were drawn as a UFPLS.
Net Value of Fund at Age 60
The LISA compares favourably for a basic rate taxpayer – as many of the under-40s will be – if direct contributions are compared. Once salary sacrifice (or employer contributions, for that matter) are considered the picture is less clear cut. In theory there is always the option of using the LISA to fund pension contributions from age 60, thereby grabbing both the LISA government bonus and tax relief. In practice that means relying on the current pension tax system continuing beyond 2037, which looks somewhat unlikely…