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LISA: A viable alternative to a pension?

In 2017, a new saving product launched to significant interest: the Lifetime ISA, or LISA. Within two years, almost 300,000 LISAs had been set up in the UK, and they remain popular. 

LISAs allow an individual to save up to £4,000 every tax year towards a first home or their retirement – the state then adds a 25% bonus on top of what is saved, meaning the account holder could benefit from an additional £1,000 per year towards their savings. As a result, they have become a rival product to traditional pension schemes; however, they have limitations that mean they are not appropriate for everyone.

Limitations of LISAs

Most notably, only those aged from 18 to 39 can set up a LISA. As stated, the maximum that can be paid in each tax year is £4,000.

Money can then be withdrawn from the pot, including the state-funded bonus cash, at any time in order for the holder to buy their first home (they cannot already own a property). Alternatively, money can be withdrawn once the account holder turns 60. A 20% penalty applies if withdrawals are made before the age of 60 and not used for a first home deposit – this penalty will increase to 25% as of 6 April 2021.

Beyond the age restrictions applied to LISAs, there are other potential drawbacks when considering this option as part of a retirement finance strategy.

Firstly, the £4,000 a year that can be paid into a LISA counts towards an individual’s annual £20,000 limit that they can save in ISAs. Further, the 25% state-funded annual bonus is no longer provided once the account holder reaches the age of 50, meaning the attractiveness of LISAs is largely removed as an individual gets closer to retirement.

The desire for alternatives

Clearly, in light of such restrictions, LISAs will not be a suitable retirement finance option for many UK adults. After all, they are primarily designed to get younger adults saving towards home ownership or retirement.

However, the popularity of the product among those in their 20s and 30s underlines the desire shared by many Britons to explore investments and savings options outside of traditional pension schemes.

A study among 2,000 people commissioned recently by My Pension Expert’s found that 38% prefer to choose their own investments or savings accounts rather than rely on a pension provider to manage their retirement funds. Indeed, almost one in five (19%) over-40s in the UK expect to derive most of their money during retirement via alternative investments, rather than a traditional pension.

Whether it’s an ISA (or LISA), an alternative investment or a pension product such as an annuity or  flexible drawdown, it is essential that pension planners seek advice before making any decision. There is a great deal at stake – one’s ability to live comfortably during retirement relies on sound financial planning.

This is just as true for people with traditional pension investments as it is for those considering alternatives. For instance, having analysed FCA data, over the weekend the Sunday Times reported that in the 12 months prior to March 2020, 57% of annuities sold in the UK were by pension providers or insurance firms to their existing customers.

This comes in spite of the introduction of Pension Freedoms in 2015 to encourage a more transparent practice that ensures pension planners know where to find the best deal. In fact, failing to shop around with rival providers when searching for an annuity could cost pension savers with a £100,000 pot as much as £23,000 over a 30-year retirement, the newspaper states.

As with all decisions regarding one’s pension, the question remains: can you really afford not to seek independent advice?