Pension plans in doubt as ‘muddled’ Lifetime ISA charges more than triple during lockdown

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Pension plans can be supplemented through Lifetime ISA savings, which not only provide Government bonuses for home purchases but also retirement savings. However, LISA holders will be issued with a penalty for withdrawals not used for either of these purposes and new research showed this is proving to be particularly damaging.

Rachel Griffin, a financial planning expert at Quilter, commented on these findings.

Ms Griffin said: “These stark figures illustrate how many people needed to raid their savings to cope with the financial strain brought on them by the pandemic.

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“Clearly, reducing the withdrawal charge to 20 percent and thus ensuring savers weren’t unfairly penalised during this difficult time was sensible.

“However, these figures also reveal that the Lifetime ISA has some significant flaws in its design.

“They were a muddled idea to start with and the Government should carefully consider their place in the long-term future of the UK’s savings system.”

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The importance of effective ISA utilisation was also highlighted by recent HMRC statistics which showed Income tax bills have doubled since 2000.

A recent survey from Hargreaves Lansdown also warned many retirees are unaware of their best options, with the survey of 2,000 people showing:

  • Almost half of basic rate taxpayers don’t know the most tax-efficient way to save for retirement (43 percent).
  • More than half of women (53 percent) don’t know the most tax-efficient way to save for retirement, and 42 percent of men.
  • Only one in 20 people think a Lifetime ISA might be the most tax-efficient way to save for retirement (six percent)

At the time, Sarah Coles, a personal finance analyst at Hargreaves Lansdown, issued a stark warning on this: “We haven’t a clue about the most tax-efficient home for our retirement savings. As a rough rule of thumb, for a basic rate taxpayer you get the biggest tax boost in a LISA and for a higher rate or additional rate taxpayer it’s a pension. But when asked to pick the most tax-efficient for them, half of people didn’t even want to hazard a guess, while among those who took a stab at an answer, only five percent of basic rate taxpayers picked the LISA.

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“It’s hardly surprising there’s so much confusion, because when you’re weighing up the tax benefits of each, they aren’t even explained in the same language. With a pension, people talk about tax relief, whereas with a LISA they talk about the taxman topping up your contribution. It doesn’t help either that the rules differ when you withdraw money too.

“To make matters more complicated, the rough rules of thumb don’t work for everyone. If you’re over the age of 39, for example, then you can’t get a LISA, so you need to check the details of your chosen scheme.

“Even when you’ve got to grips with the tax arrangements, bear in mind that tax isn’t the only consideration. It also depends enormously on who else is paying into your retirement savings. It means that for most basic rate taxpayers (or at least the ones with a LISA), the best option for the first chunk of your money is your workplace pension, then for the next chunk it’s the LISA, and then once you’ve used that allowance, it’s back to the pension. It’s hardly surprising that so many people are unsure of the best approach.”

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