The State Pension could be in decline. Here’s why I’d invest through a Lifetime ISA or a SIPP
he one thing I hate about the Lifetime ISA is that I’m too old for one. To open one, you have to be between the ages of 18 and 39. You can keep contributing until you reach 50, but I’m not even close to that.
As well as the usual benefits of ISAs, in that you don’t pay any tax on any of the gains you make, a Lifetime ISA comes with a few quirky rules and regulations. My colleague Roland Head has explained the details here, and I just want to concentrate on one key point.
That’s the 25% extra the government will add to your investments. You can invest up to £4,000 per year in a Lifetime ISA, netting you a bonus of up to £1,000. The downside is that, to actually keep the top-up, you can’t take any money out before you reach 60 (or buy your first home, or suffer from a terminal illness).
Other than in those situations, you’ll be penalised 25% of any withdrawal. What’s particularly nasty is that you’ll actually lose more than just the bonus cash. The government contribution will add £1,000 to your own £4,000, but if you then try to take out the resulting £5,000 you’ll forfeit 25% of that, which is £1,250.
So if you’re thinking of using a Lifetime ISA to help fund your retirement, you need to make sure that the cash you invest really is cash that you won’t touch until you start scratching a 60-year-old head.
But if you can do that, the extra bonus boost could be considerable. If you make full use of your allowance until age 50 and attract the full government top-ups, you’ll get a total extra of £32,000.
Just in the 10 years between age 50, when contributions and bonuses stop, and 60, when you can withdraw cash with no penalty, how much might it be worth? Based on the historic record of the UK stock market returning 4.9% above inflation per year on average, your gifted £32,000 could be worth more than £50,000 allowing for inflation. That’s an extra £50,000 the government would have contributed to your retirement pot!
When you think that the State Pension currently pays £8,767 per year, or just £168.60 per week, you really can see the benefit. Today’s pension really doesn’t provide very much, and there are growing fears that even if it does grow at least in line with inflation, rises in the pension age could end up losing you a big chunk of cash compared to what today’s new retirees will receive.
A Lifetime ISA can only go part of the way, as it’s limited on both time and in the cash you can invest. But there are benefits to be had from using a SIPP too, and that’s my strategy – to use a combination of an ISA (a plain Stocks and Shares ISA in my case) and a SIPP.
I pretty much fell into my SIPP without any real planning, as it’s where an old company pension ended up after I liberated it under today’s pension freedoms. But a SIPP does provide complementary tax benefits to an ISA, providing relief on contributions rather than relief on withdrawals.
Together, I reckon an ISA (Lifetime, if you’re eligible) and a SIPP make a great combination for retirement investing.