The Fixer: Lifetime ISAs

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Dear Fixer,
I have been reading about the government's new Lifetime ISAs, which are being launched next year.

I am already a homeowner, but am under 40 so I will be able to take one out to save towards retirement when they become available.

As a self-employed worker, I do not receive a pension from an employer, so it's important for me to start saving for retirement now.

Is a Lifetime ISA a better place to save than a pension scheme? Thanks in advance for your help.

D Foster, Chelmsford

Dear Mr Foster,
Lifetime ISAs are a new tax-efficient savings scheme that will become available to people aged under 40 from April next year.

Under the terms of the scheme, the government will pay in £1 for every £4 saved. In other words, they will top up your savings by 25%.

By saving into a Lifetime ISA you should therefore receive £1,000 (plus investment growth) for every £800 paid in, compared to £850 (after basic-rate tax) in a pension fund.

However, the maximum you can invest is £4,000 a year, while the 25% bonus is only paid until you hit the age of 50.

Unless you use it to pay for your first home, you also need to leave it invested until you reach the age of 60 - or you will lose the bonus and have to pay an additional 5% penalty

A Lifetime ISA alone is therefore unlikely to be sufficient to afford you a comfortable retirement.

If you will be paying a lower rate of tax in retirement than you do now, the higher upfront tax relief on pensions, coupled with the lower income tax on withdrawals, also makes personal pensions more attractive.

So to avoid missing out on the government handout, why not open a Lifetime ISA and a personal pension scheme?

That way, you can take advantage of the free £1,000 a year by paying the maximum into the Lifetime ISA until you are 50, and benefit from pension tax relief on the rest of your savings.

The Fixer

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