Lifetime ISAs – the best thing that shouldn’t exist

Link I read this yesterday and I was very surprised.  Apparently, the LISA might be scrapped because the Treasury Committee says they are ‘complex and offer perverse incentives”.  And what are these perverse incentives? Well, apparently, “concerns have previously been raised that if people are saving for later life into a Lifetime Isa, it could discourage them from saving into a workplace pension. In the latter, they get the benefit of employer contributions into their pot. Critics have also argued that a home and a pension are two very different savings goals.”

I find this all a bit funny.  I think that the LISA is both a terrific and a terrible idea.  It’s terrific because it allows the Lady and Gentleman to save £8,000 a year – receive £2,000 a year from the tax man and to be able to access it free of tax when we are 60.  It’s such a good deal that I have it factored into our FIRE cashflow forecast for years to come.  Overall, between it’s around a £30,000 tax free bonus from the tax man.

Alternative saving options for Pensions include the Gentleman’s salary sacrifice pension from my emloyer with split employers NI contributions.  That gives me around an extra £47* (or more) on money I pay in.  Needless to say I pay in the maximum amount I can. **

The Lady pays in a matched 1:1 5% into her company pension without the benefit of salary sacrifice and that means above the 5%, the benefit of paying into the pension is 6.25%*.

So in order of priority we simply do this:

  • Gentleman’s Pension to matched limit (5% me: 7% them)
  • Lady’s Pension to matched limit (5% her: 5% them)
  • Gentleman’s Pension to Annual Allowance
  • Both LISAs

Since the Lady’s pension has such a poor uplift, and we are already saving over £50,000 a year in our Pensions, we don’t need to pay in any more.  We actually need to money today to retire early and an additional 6.25% won’t quite cut it.

On the topic of if the LISA is a good product or not, I disagree with the Committee on the LISA, I think that it can be demonstrated to be useful and an alternative to workplace pensions.  But I do agree that it is confusing – is the choice for the young so dire that you can either spend the next 20-40 years in shared accommodation to retire at 60 or buy a house and never reitre at all?  To use the LISA on buying a home would be shear stupidity – although I’m not sure if you can continue to pay into your LISA if you buy a house at say age 35 with it.  It shows what options are open to you if you have money or BOMAD to help you out.

The problem that I have with the LISA is that I don’t think it should really exist.  It confuses property with pension and that makes it a confusing product.

It only really helps those who are already well off and have free cash available (like us) and it’s all tax payers who pay for it.  That wasn’t mentioned by the Committee – much like why the ISA allowance is £20,000 (who can actually squirrel that amount away anyway?  you could raise it to £1m and it won’t benefit your Average Joe).

But whilst the government has the LISA available, I might as well make hay while the sun shines and pocket that £2,000 every year.  It’s one of the potlets of my Four Pot Solution and given that the odds are stacked against young(ish) folk like us, we need every bit of help we can get.

If you don’t have a LISA, you really should get one right now before they disappear.  I use YouInvest, you could too.

*Assumes full tax relief going in and 20% tax on the way out upon retirement with the 25% tax free lump sum.

**I might get round to writing out the calculation – but needless to say, that without salary sacrifice and beyond the matched amount, for basic rate tax payers, the LISA is a probably a better bet – especially since you have full access at 60 and don’t have to put up with your employers typically expensive scheme

For a different perspective on LISAs – I would recommend a read of this blog by Young FI Guy.  He much more persuasively argues the case against LISAs – which I tend to agree with but still feel that for our circumstances the LISA is a useful product.


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