Hargreaves Lansdown won Best Lifetime Investment ISA at the YourMoney.com Investment Awards 2024, knocking Dodl by AJ Bell off its perch.
Over the course of the YourMoney.com Awards, which launched in 1998, Hargreaves Lansdown has been a regular winner in the investment and pension product categories. In total, it has scooped 14 gongs, with our very own YourMoney.com readers rating it the best in the field.
As part of YourMoney.com‘s showcase of award winners, Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, suggests these five questions to ask yourself before opening a LISA.
1) Do I get an employer contribution to my workplace pension?
LISAs can be a really effective way of planning for retirement. The 25% Government bonus acts in a similar way to basic-rate tax relief on a pension and income can be taken tax-free.
However, if you also have the opportunity to be enrolled into a workplace pension and benefit from an employer contribution, then this is probably the best place to start your retirement saving.
Over time, the employer contribution can add a significant amount to how much goes into your pension. However, this doesn’t mean you can’t still use your LISA as a further option within your retirement savings plan.
This is why the LISA can be a very good option for the self-employed. They aren’t included in auto-enrolment and so don’t get an employer contribution.
In this case, a LISA can prove a good choice for self-employed people paying basic-rate tax, as they also have the ability to access the money early if they need to, albeit subject to a 25% exit charge.
2) Am I a higher-rate taxpayer?
If you are looking to use a LISA as your primary retirement planning vehicle, you need to think about the impact of tax relief.
If you contribute to a pension, you will receive tax relief at your marginal rate, so for a basic-rate taxpayer, £100 going into your pension will only cost you £80. If you are a higher-rate taxpayer, it only costs you £60. For additional-rate payers, it is more attractive still, as that £100 contribution only costs you £55.
It’s a compelling incentive to contribute to a pension, and if you compare this to the Government bonus on a LISA of 25% on contributions up to £4,000, then you get a better deal from a pension if you pay tax at the higher or additional rate.
3) Can I use my LISA if I’m buying a property with my partner who has owned a home before?
Only first-time buyers can use a LISA to purchase a home. However, you can still use your LISA to purchase your home with your partner even if they have owned a house themselves before.
However, you must ensure that the home you purchase is worth less than the current £450,000 cap, otherwise you will have to pay a penalty. You must also ensure your name is on the mortgage.
4) What happens if I need the money earlier?
LISAs are designed to be accessed for property purchase after the age of 60 or earlier in the event of terminal illness. However, in the event of an emergency, you can access it early, though this will be subject to a 25% exit penalty.
The ability to access the money early is one reason why the LISA can be a useful retirement planning vehicle for the self-employed, who may be hesitant to tie their money up into a pension. Using a LISA gives them peace of mind that if earnings become volatile, then they can access the money if needed.
5) What impact will the early-access penalty have if I need my money?
The 25% exit penalty not only removes the Government bonus, but also a slice of your hard-earned savings.
As an example, someone saving £4,000 into a LISA will get a 25% top-up, giving them £5,000. If they were to withdraw that money early, then they would receive a 25% penalty on that £5,000, which works out at £1,250. This means you’ve not only lost the Government bonus, but £250 of your own money too.
At Hargreaves Lansdown, we are calling on the Government to reform the LISA by reducing this exit penalty from 25% to 20% to prevent this from happening.
In addition, increasing the upper age limit for opening a LISA from 40 to 55 could help many more people build up their financial resilience in retirement.
Helen Morrissey is head of retirement analysis at Hargreaves Lansdown.
Hargreaves Lansdown is the UK’s number-one investment platform for private investors, with over 1.88 million clients entrusting it with £155.3bn (as of 30 June 2024).
Customers have access to Self-Invested Personal Pension (SIPP) accounts, SIPP Income Drawdown, Uncrystallised Funds Pension Lump Sum (UFPLS) payments and annuities, as well as over 14,000 investment options across funds, shares, exchange-traded funds (ETFs), investment trusts, bonds and gilts. Clients can manage their pension savings alongside a full suite of ISA wrappers, a general investment account and Active Savings, the UK’s largest retail cash savings platform.
