Can I use one LISA for retirement and one for a deposit?

13 October 2022

Question by Jayden

I know I can hold more than 1 LISA as long as they are opened in different/consecutive tax years and I only invest £4000 total in one LISA per tax year. If I open 2 (one cash and one stocks and shares) can I use one for retirement and one for a deposit? Eg if I use one for a deposit, will I still get the benefit of 25% government bonus in the other if I continue to pay into it until I’m 50 and use it after 60?


Answered by Boring Money

Hello,

You do not have to designate a specific part of your LISA to house buying and another to retirement. You can decide on withdrawal what it will be used for. So for example you are likely to buy a house much earlier than you are likely to retire so when you have saved enough in your LISA and found the house you want to buy you just take that amount any additional amounts in your LISA can be used after age 60 to fund retirement. You can continue to contribute your £4,000 per annum up to age 50. It is worth considering a traditional pension in addition to a LISA for saving for your first home as for a lot of people it is a better option. For example every time you contribute to a pension you get a bonus from the government in the form of tax relief so if you put in £80 a month as a basic rate tax payer £20 would be automatically added each month.

A summary of the differences between a LISA used for retirement purposes and a pension is as follows. The 25% LISA bonus is effectively almost the same as a basic-rate taxpayer's 20 per cent tax relief (in that 20 per cent tax relief on £4,000 would boost it to £5,000 – an increase of 25 per cent, confusingly!). But there are two key differences. One is that a bonus added at the end of the year wouldn’t earn interest or investment growth throughout that year – unlike the tax relief on pension contributions, which are added instantly. That would result in slightly lower growth each year for the LISA, the effects of which would multiply over time. The other, bigger difference is that higher-rate taxpayers currently receive 40 per cent tax relief on pension contributions – double the bonus given for a LISA.

The LISA also has a maximum contribution of £128,000 (before bonus) and a £4,000 annual limit that comes out of your £20,000 annual ISA allowance (2021/2022 tax year limits). By contrast, your pension has a lifetime limit of £1 million (though remember, that’s contributions plus growth) and an annual allowance of £40,000.

At present, there appear to be no plans to arrange for employer contributions into a LISA, which would be another big drawback compared to a pension.

I hope that helps, it is a complicated subject but so important. If you fancy a chat or have any further questions, feel free to book a 15 minute free chat via my online booking system.

https://calendly.com/maryrosewoodfinancialplanning

Mary :-)

Answered by

Boring Money