Stocks & Shares and LISA for retirement

TitanLilly

I’d really appreciate some advice about my Lifetime ISA. I already own my home, so I opened the LISA purely as part of my retirement planning — but I’m starting to question if it’s still the right choice for me.

My goal is to start going part time around age 55, then fully retire by 60. I’d plan to use either my LISA, my Stocks & Shares ISA, or both to bridge the gap until I can access my Defined Benefit pension at 68.

However, I’ve seen mixed opinions — even Martin Lewis seems a bit unsure about using a LISA for retirement rather than for a first home, which has made me wonder if I’ve made the wrong call.

Would it make more sense to close the LISA now and take the penalty, rather than risk losing more later on? Or is it still worth keeping alongside my Stocks & Shares ISA for the long term?

Any thoughts or experiences would be really appreciated — thank you!

El_Torro

If you're happy to wait until you're 60 to access a LISA then it's simply better than an ISA, because of the uplift you get in the LISA. 

For a 20% tax payer:

Put £4k into a LISA, get £5,000 after the uplift. All this money can be removed when you are 60 or over tax free.

Put £4k into a pension, get £5,000 after tax relief. When you withdraw £1,250 will be tax free and £3,750 will be taxable. How much (if any) tax you pay will depend on your other earnings at the time. You can also access this money at 57, possibly older by the time you actually get to that age. 

So arguably investing in a LISA for your retirement is better than investing in a pension if you are a 20% tax payer today. If you are currently a 40% tax payer and you plan to be a 20% tax payer in retirement then the pension is more beneficial. 

I digressed a bit there but I have a question for you: Why do you think it would be a good idea to cash in your LISA now and pay the penalty in doing so?

ColdIron

A LISA is still a good vehicle for retirement if you can wait until 60. In financial terms it's better than an ISA or pension (for basic rate taxpayers). It would make sense to use the ISA first until 60 and then supplement it with the LISA before 68 if needed/possible. I certainly wouldn't cash it in and take an unnecessary hit if it could be avoided. What would you do with the money? Also I hope the LISA is not in cash

TitanLilly

I am a basic rate (20%) tax payer. I am 32 years old. 

I have a separate Stocks and Shares ISA with Trading 212, which is penalty free if I withdraw, so I am happy to wait until I’m 60 before using the LISA from Moneybox. 

The money would be used for general bills and living once I’ve gone part time / retired. The mortgage will hopefully be gone before I go part time at (hopefully) around 55. 

The idea of taking the money out of the LISA now, taking the penalty hit on a lower sum and closing it down, and transfer it all into my Stocks and Shares ISA, after listening to a recent podcast seeming to suggest that using the LISA for retirement was not a good idea. 

DRS1

If you are thinking about retiring at 60 when your DB Scheme has an NRA of 68 then maybe have a look at what extras the DB Scheme offers.  Some of them have the ability to pay an amount to reduce the early retirement factors so you can get an unreduced pension from 67, 66, 65 etc.  I have no idea what it would cost to get the full pension at 60 or if that is even possible in your scheme.  But it is something to investigate

Some of them (eg LGPS) have special rules for AVCs which can allow you to take the whole AVC fund as a tax free lump sum by combining it with the main scheme pension and multiplying by a figure (6.66) to work some magic.  I am probably not describing that correctly but it can be advantageous compared to having a separate SIPP where you would only get 25% as a tax free lump sum.

I am not saying these would be better than an ISA or LISA but if you have maxed them out and have something left over then these may be worth looking at.

ColdIron

TitanLilly said:

The idea of taking the money out of the LISA now, taking the penalty hit on a lower sum and closing it down, and transfer it all into my Stocks and Shares ISA, after listening to a recent podcast seeming to suggest that using the LISA for retirement was not a good idea. 

Podcasts aren't the best source of advice. Can you explain why it's not a 'good idea'? Certainly the maths don't bear this out

Imagine you put £4,000 into a LISA and got the £1,000 bonus so £5,000

Let's ignore growth to keep it easy

You cash out and pay a 25% penalty and put the £3,750 into an ISA

Your LISA was worth £5,000 and now your ISA is worth £3,750

Why would you do this?

Notepad_Phil

ColdIron said:

TitanLilly said:

The idea of taking the money out of the LISA now, taking the penalty hit on a lower sum and closing it down, and transfer it all into my Stocks and Shares ISA, after listening to a recent podcast seeming to suggest that using the LISA for retirement was not a good idea. 

Podcasts aren't the best source of advice. Can you explain why it's not a 'good idea'? Certainly the maths don't bear this out

Imagine you put £4,000 into a LISA and got the £1,000 bonus so £5,000

Let's ignore growth to keep it easy

You cash out and pay a 25% penalty and put the £3,750 into an ISA

Your LISA was worth £5,000 and now your ISA is worth £3,750

Why would you do this?

Because I think the OP thinks by taking the penalty now they lose less money than if they take the penalty at a later date when the LISA is worth more. However OP multiplication is cumulative, so the actual money you'll get out will be the same (assuming charges etc are the same) whether you take the penalty now or take the penalty at a later date - and if the penalty is ever removed then you'd have taken the extra penalty for no good reason. So maybe keep the LISA and also start an ISA for needs below 60.

TitanLilly

Thank you all for your suggestions and advice. I’ll keep doing my research, but plan to keep my LISA for now, and my Stocks and Shares ISA, I don’t plan to withdraw from the LISA until the age of 60, and if I need money before then I’ll use my S&S ISA. 

SarahB16

Not sure if you've considered this but make sure from the age of 60 to 68 you are not wasting your personal allowance.  Initial observations based on what you have shared would be to take your DB pension at 68 but as you wish to fully retire at 60 is to make sure you have a SIPP and draw this down from 60 to 68 (to ensure your personal allowance is used). 

ukdw

Option 1 - Pension - 20% tax on drawdown at age 58 probably
£4000 > £5000 >   =   £1250 tax free, £3750*80% = £3000 - so total £4,250

Option 2 - Pension - Tax free on drawdown

£4000 > £5000 - total £5000

Option 3 - LISA - drawdown age 60

£4000 > £5000 - total £5000

Option 4 - LISA drawdown at age 50 -   not possible with SIPP, but for LISA you get
£4000 > £5000 - reduced by 25% to £3750.

Option 5 - ISA 

£4000. - always available.

I think the best answer is a mix - the biggest advantage of the LISA over a pension is the fact that you can still get at most of the cash if you need it - but if you don't you get quite a good benefit.

During the pandemic I seem to remember they suspended the 25% penalty - so I guess its not out of the question that it might happen again at some point.

Albermarle

However, I’ve seen mixed opinions — even Martin Lewis seems a bit unsure about using a LISA for retirement rather than for a first home, which has made me wonder if I’ve made the wrong call.

I would not take everything Martin Lewis says as always 100% accurate.