LISAs - what's the catch?

[Laquila]

I've been reading up on these and wondering whether I should get my husband to open one - he's nearly 40, self-employed and doesn't have any kind of pension or retirement savings. I understand you can open one with very little money in it, as long as you're 39 or under - u can't see a disadvantage to doing so, at least whilst we work out his pension options?

Does anyone have a LISA instead of a pension?

LISAs are topped up by the government by 25%. If you put the same money into a pension and you are a basic rate tax payer then what you get from a LISA and the tax relief into a pension is the same.

If your husband is a higher rate tax payer, he will get more tax relief if he put it into his pension.

With regards to accessing the pension, you can access it at 55 (although this is increasing to 57) and only 25% will be tax free. Whereas; with a LISA you can't access it until 60 but it's paid out tax free.

A LISA can also be used to buy your first home so if you aren't already a home owner you could access it before 60.

Money paid into a LISA is restricted to £4000 a year, whereas into a pension you can pay up to 100% of your earnings (capped at £40k).

There's also inheritance tax you may need to consider since you don't pay IHT on funds held in a pension.

So, I think it comes down to how much your husband earns, how much does he want to contribute/save, when does he want to access it and if there is any IHT to consider.

This is so useful, @drugsdontwork, thank you (and broadly tallies with what I'd understand already from MSE!)

He earns about £27k p/a on average, I'd say, and although he's keen in theory to save for retirement, in practice it doesn't seem to be happening. I think it's partially because for a few years we've talked about buying a second property as a BTL (he is a builder and joiner) and he sort of sees that as a pension pot. Even though it hasn't happened 🙄

As you say, we need to consider IHT, amongst other things. In terms of accessing the money, if we were only putting in up to £4k a year I think we could keep it separate til 60. I thought I'd read that it could be accessed before 60 with penalties incurred - I must check that.

I'm definitely going to get him to open one quick, before he's 40, and then we'll discuss what what to do with it once it exists! Thank you for replying.

Ah yes you are right. I think the penalty means any government bonus is clawed back. Maybe more or less if you save into stocks and shares.

Another thing, I think you can only pay into a LISA until age 50, so that's 50k roughly. Whereas a pension can be contributed to a lot later and therefore he can save a lot more.

Definitely get it open as he can't open it after 40, but can continue paying into an open one until he turns 50 (technically you can transfer to a new provider after 40, but lots of people have struggled to do that).

To follow on from what a previous poster said - a 25% penalty is applied if you withdraw any money prior to 60. This actually means you lose more than just the bonus from the government (effectively you pay a penalty of 6.25%).

Example:
You put in £4000
Government bonus of £1000 take total to £5000
You request to withdraw £5000
Government 25% penalty charged on £5000 = £1250
You receive £3750

So you can access the money if absolutely necessary, but will get less than you put in. The only loophole is that you can withdraw free of charge if diagnosed with a terminal illness and have less than 12 months left to live.

Also, the 25% penalty is applied in the same way regardless of whether you save into a cash LISA or stocks and shares

It could make sense to open a LISA with £1 to at least keep options open, even if you eventually go a different route. I agree though that he needs to start planning for his pension sharpish!

Have you sat down with him and run some numbers? Required annual income etc? It’s all very well him saying you’ll get a BTL but the tax advantages for landlords have been eroded in recent years so there’s less profit, plus it’s risky and can be quite time consuming; would it actually provide the income he needs to maintain his lifestyle in retirement?

How’s your pension pot looking? Enough to subsidise both of you?

@dyme - my pension pot is pretty low although I'm maximising employers' contributions and currently putting in 10% of my salary (I work part-time) so I'm not be right road. But you're right - we need to sit down and discuss it properly as I think it's fair to say he probably hasn't thought through all the implications of the BTL plan. (Having said that, it isn't a terrible idea for us - we live in an area where property prices are generally low and rental demand is high, and we'd buy something very local, making it easier/quicker to renovate.)

Thank you everyone - I opened one for him last night using Moneybox - it took 5 minutes and I already feel as though I've achieved something, financial-planning-wise 😁