Retirement – ‘Attractive alternative’ to pensions may save £415k by 50

A Lifetime ISA (LISA) can be an “attractive alternative” to saving into a pension as Britons can get free cash from the Government. Research shows that someone contributing £4,000 per year could end up with £415,000 by the age of 50 and £676,000 by the age of 60.

Savers aged between 18 and 39 can open a LISA where they can save £4,000 per year until they turn 50.

The Government then adds a 25 percent bonus to this amount, to a maximum of £1,000 per year.

Hargreaves Lansdown (HL) calculations highlight the benefits of a LISA, which may often be overlooked as it’s more of a long-term saving vehicle. However, the benefits can be life-changing.

Someone paying £1,000 per year into a LISA from the age of 18 could accumulate almost £104,000 by the time they hit 50.

Even though they can’t contribute after the age of 50, compound investment growth over the next ten years could see them with around £169,000.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “If you are aged under 40 then a LISA could play a major part in your retirement planning.

“The 25 percent bonus is a significant uplift to your savings, which over time and added to long-term investment growth could see you accumulate a tidy sum.

“In 2022 HL clients received over £61million in LISA bonuses which will have boosted their long-term savings.”

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If people can contribute £4,000 per year then they could have as much as £415,000 by the age of 50 and over £675,000 by the time they hit 60.

Ms Morrissey explained that there is no tax to pay on interest, income or capital gains from cash or investments held in a LISA.

Savers could put this money to work as a bridging income between the age of 60 and state pension age, or leave their pension invested until much later and draw down their LISA.

She continued: “As more of us approach retirement with mortgages still to pay, your LISA could be used to pay it off and give you a bit more income to play with in retirement.

“LISAs can also be an attractive alternative to pensions for groups such as the self-employed who are not covered by auto-enrolment.

“The 25 percent bonus boosts their retirement saving in a similar way to basic rate tax relief and for those who don’t benefit from an employer contribution then it’s an option worth considering.”

Another important factor is the ability to access the money in a LISA in times of stress.

Pensions cannot be accessed until age 55 whereas people can access the funds in a LISA albeit subject to a 25 percent penalty.

Ms Morrissey stated: “In times where money might be tight the ability to do this can add much-needed flexibility though we would like to see the level of the penalty permanently reduced to 20 percent.”

Hargreaves Lansdown, along with other organisations, is now calling for the penalty charge to be reduced to 20 percent permanently and for the Chancellor to address this in the upcoming Spring Budget.

At the start of the pandemic, the charge was temporarily reduced to 20 percent but this only lasted until April 2021.

She concluded: “People are trying to do the right thing and build up their financial resilience and they shouldn’t be penalised for having to access them during tough times.”

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