Assuming that I am not interested in purchasing a flat using lifetime ISA, is it ever advantageous for me to put money into it in place of a pension?
Since lifetime ISA gives 25% tax relief on investment, this is the same as it being tax free for basic rate taxpayers, and it is also tax free when one turns 60. It seems to me that for basic rate taxpayers it is more tax efficient to be in lifetime ISA than in a pension scheme. Am I missing something? Does this logic continue to hold for higher and additional rate taxpayers?
Since this question is complex and depends on a lot of variables, not least being rate of return on investments and future tax regime (when one draws income), let's make some simplifying assumptions:
- Real rate of return on investment is zero (ie pot grows exactly at the rate of inflation)
- Tax bands change also exactly at the rate of inflation (so no real changes in government tax policy)
- You can compute everything in today's GBP (then you don't need to worry about what the rate of inflation will be)
I am probably being a bit conservative on investment growth and optimistic on tax policy, but maybe on average not too wrong. The remaining variables then are:
- Current marginal tax bracket
- Current size of investment pot
- Expected total employer's contributions to the pot over the rest of my life (expressed in today's GBP)
- Other expected income outside of the pension (for instance rent on owned properties, etc)
- Assume my contribution is marginal (£1 say) so that you don't need to worry about any changes in the tax bracket
The last two variables allow you to compute the tax bracket I will be in when I retire and start drawing income. Assume that income will be drawn at 5% of the pot size per year. Ideally the answer should be precise and expressed in terms of the above variables. Extra kudos if you relax any of the assumptions, but it's not necessary for me to accept the answer and give a +1.
If you want to make different assumptions I will accept the answer as well so long as they're reasonable.