Olympic Gold Wins for Team GB: Planning Leads to Success
Team GB has celebrated the success of several Olympic medal wins this week. The television coverage of the games has caught the hearts of the nation, and interviews with athletes and their families have given us all a glimpse of just how much work and planning goes into preparing for these events. But behind the medalists stands a retinue of coaches, nutritionists, physios and mentors who help to lay the foundations of that success for the athletes. Having that team behind them is crucial to bringing about Olympic medal success.
Whilst planning for retirement might not require you to do forty lengths of the pool every day before breakfast, it does require some investment of time, thought and action if you want to reach the lifestyle you hope for. And it needs a team. At Furnley House our expert independent financial advisers, paraplanners and administrators provide the support team that enables our clients to reach their financial goals.
Retirement planning can be complex. There are lots of ways you can save, and regular reviews are important. Work-based and private pension plans oﬀer excellent tax advantages, and should be the first saving plan to consider. However, people often chose to diversify the way they save. Buy-to-Let is a popular choice, as are other investment accounts.
In this article we take a look at Lifetime ISAs which are a more recent investment product that can be used as part of a wider retirement plan. If you would like to have your existing retirement saving plans fitness-checked, then our team of experts would be happy to help, so please do get in touch.
Lifetime ISA: Helping You Reach Your Retirement Saving Goal
Lifetime ISAs are usually marketed to first-time buyers as a incentivised way to save for a deposit for a first home. Yet they have also been designed for those saving for retirement. Whilst they should not take precedence over a pension, they oﬀer a very useful tool to help investors put money away for the future in a tax eﬃcient way.
You can put in up to £4,000 each year into a Lifetime ISA until you’re 50. You must make your first payment into your ISA before you’re 40. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
The Lifetime ISA limit of £4,000 counts towards your annual ISA limit. This is £20,000 for the 2021 to 2022 tax year. You can hold cash or stocks and shares in your Lifetime ISA, or have a combination of both. When you turn 50, you will not be able to pay into your Lifetime ISA or earn the 25% bonus. Your account will stay open and your savings will still earn interest or investment returns.
As the Lifetime ISA 25% government bonus mimics pension tax relief, it oﬀers the same or in some cases better tax incentives than a pension plan.
Pension tax relief means for every 80p paid into a pension by a basic rate taxpayer, or 60p as a higher rate taxpayer, the Government tops it up so that £1 is saved into a pension. However, someone who saves 80p into a Lifetime ISA meanwhile, would get a 25% bonus to their contributions, adding an extra 5p to their pot for every pound they save. For a basic rate tax payer a Lifetime ISA therefore may oﬀer you a higher government top up to your savings plan.
Accessing money in your Lifetime ISA
One of the advantages and appeal of a Lifetime ISA is the ability to draw a completely tax-free income and being able to access your capital whenever it is required. However, there is a drawback: ﬀ you access the money before the age of 60 you will incur a penalty which wipes out the government top up.
Withdrawing money before the age of 60 should therefore be considered only for serious emergencies, and a Lifetime ISA should not be considered as a regular savings account.
Tax treatment on withdrawals
When you begin to make withdrawals from a Lifetime ISA, it is important to remember that the way you are taxed diﬀers from a pension plan. While money saved into an ISA is taxed on the way ‘in’, i.e., any income tax has already been paid on that money, it is then free of tax on the growth of capital and on the way ‘out’. Pensions however are tax-free on the way in but, beyond a 25% tax-free lump sum, income tax must be paid if a pot, and the income from it, is large enough.
A Lifetime ISA therefore provides an important element of diversification within a portfolio. Considering your other pension savings and having a discussion with your financial adviser about your expected income tax status in retirement will be helpful, and can guide your decisions about the benefits of a Lifetime ISA as part of your retirement saving plans.
A solution for complex retirement planning
Lifetime ISAs can also be used for those with very diﬀerent saving needs, such as those with significant pension savings but who are reaching the pension lifetime allowance limit, or those who have reduced pension annual allowances.
The pension lifetime allowance is currently £1,073,100 and you usually pay tax if your pension pots are worth more than this. Whilst this is a significant allowance, in many cases people reach this amount from employer contributions. The Lifetime ISA sits outside of the lifetime allowance and can oﬀer a simple solution to this more complex retirement saving problem.
Find out more
If you would like discuss the fitness of your current retirement savings plan or find out more about Lifetime ISAs could improve your retirement plans overall performance, then our team of experts at Furnley House can help. To find out more call 0116 269 6311 to get a no-obligation quote, or email email@example.com.
Past performance is not a reliable indicator of future performance.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.