Why a LISA could help to keep your retirement dreams alive

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Many people have dreams of retiring early and spending their older age holidaying, seeing friends and family and generally enjoying themselves. The problem, though, is that generating a sufficient income in retirement in order to do that is difficult.

The cost of housing is high in most parts of the country and wage growth has been sluggish for a number of years. This means that building a nest egg for retirement is tough. And with the state pension being just £8,500 per year, an alternative source of income in retirement is required.

One way of potentially improving your retirement prospects is a Lifetime ISA (LISA). It provides a simple and straightforward means of planning for retirement, while also offering flexibility that a pension simply cannot match.

Sound investment

While a LISA does not offer a tax break in the same way that a pension does, it comes with a government bonus which could be relatively appealing. An individual can put up to £4,000 into a LISA each year, with the government providing a bonus of up to £1,000. This helps to offset to some degree the major difference between ISAs and pensions, with contributions to the former being from after-tax income and payments into the latter being from before-tax income.


Withdrawals from a LISA are tax-free and can be made without penalty after the age of 60. This makes them more appealing than a pension, since all but 25% of withdrawals from a pension are potentially subject to tax. And while a pension can be drawn down from the age of 55, withdrawals from a LISA are allowed at any point. If the withdrawal will be used to buy a first home, there is no penalty for doing so.

However, withdrawals for any other purpose (except terminal illness) are subject to a 25% penalty. Still, a LISA could provide help in an emergency when cash is required at relatively short notice. For a younger investor with a mortgage or young family, this could provide peace of mind versus a pension, where withdrawals are more restricted.

Availability

A LISA is available to any individual between the ages of 18 and 40. Money can be paid into it until the age of 50. Setting one up is very straightforward, and the fees involved in doing so are relatively low. In fact, they do not differ significantly from ISA fees, with a wide range of investments available to buy and sell within the product.

Since the retirement age is increasing and the state pension is insufficient to fund many people’s retirement dreams, a LISA could be a useful means of planning for older age. Even if an individual is more worried about buying a home rather than retiring, it still makes sense to obtain a £1,000 government bonus each year for what is relatively little effort. Retiring early may seem to be getting more difficult, but through planning ahead it remains an achievable goal.