Planning for retirement can seem like a daunting prospect. There’s so many products and services to help you save for the future on the market, it’s difficult to distinguish between them and determine which one is the most suitable for your situation.
The latest product to hit the market is the Lifetime ISA (LISA), which has many benefits of the self-invested personal pension plan (SIPP), but with more flexibility.
Both of these accounts allow investors and savers to manage their own funds for retirement with some key differences. In this article, I’m going to consider the pros and cons of both and try to establish which is the best for retirement saving.
Flexible limits
The LISA is undoubtedly the more flexible product. Savers can put away £4,000 a year into this product up to the age of 50. The government will then add a 25% bonus to any contribution giving a maximum possible yearly savings total of £5,000. So, if you max out your savings allowance every year between 18 and 50, you could receive a maximum bonus of £33,000.
A SIPP has bigger contribution limits but has stricter tax and withdrawal rules. You can put away £40,000 a year into a SIPP without any adverse tax benefits. If you earn over £150,000 a year, the allowance is reduced by £1 for every £2 of income above £150,000. You also receive tax relief on pension contributions (if you’re a taxpayer) of 20% and higher, or additional-rate, taxpayers can claim back a further 20% or 25%. For 2018, the lifetime allowance limit for saving in a SIPP is £1.03m.
Both of these products offer a useful bonus on your savings and can be used for retirement, but here the similarities end.
When it comes to flexibility, the LISA wins. As well as saving for retirement, you can also use the product to fund the purchase of a home, as long as you’re a first-time buyer. Unfortunately, if you already own home, you cannot claim this benefit. Any withdrawals that don’t qualify will be taxed at 25%, a levy that’s designed to take back the government contribution, and more.
According to my figures, this fee would grab back the government bonus as well as well as 6.25% of your personal contributions. If you use the money for retirement, or first home purchase, there’s no fee or additional tax to pay.
SIPP’s can’t be drawn down until 55 and, even then, withdrawals attract tax. The first 25% will be a tax-free lump sum and you’ll get charged tax on the rest as if it were income.
It all comes down to you
Overall, which product you choose to use ultimately depends on your financial situation. SIPP’s allow you to save more every year, although you cannot access the funds until retirement.
LISA’s can be accessed at any time if you have a funding emergency. Although these withdrawals will cost you money, you won’t have to pay any extra income tax on top.
Personally, I am using a combination of both. This gives me the flexibility of the LISA, with the long-term financial security of having a SIPP in place. I reckon this is the best combination of long-term security and short-term flexibility, while making the most of the tax benefits offered by both products.
