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Dec 22

Should you have a pension or LISA?

Reading Time: 3 mins

Wondering whether to get a pension or a LISA?

We recently collaborated with leading pension provider PensionBee to bring you six podcasts all about pensions. These podcasts cover the basics as well as looking in depth into different types of pensions.

In this episode of the How To Be A Money Magpie podcast, founder Jasmine Birtles is joined by Clare Barret, Personal Finance Editor at the Financial Times and financial advisor David Braithwaite to look at private pensions and their step-sister, LISAs (Lifetime ISAs). They discuss the pros and cons of both, which is better and whether you should consider having one of each.

Listen to the podcast below, or read the written summary!

 

How much can you put into a LISA?

David says:

  • Up to £4,000 a year
  • The government gives a bonus of 25%
  • This counts toward the £20,000 a year limit, so you can put the other £16,000 into other ISAs
  • They are good for those looking to get onto the property ladder
  • Pensions and LISAs have very slight differences in restrictions

 

What’s the difference between a LISA and a pension?

Clare says:

  • You can only open a LISA before the age of 40, and can only put into it until you are 50
  • It can give you some options for later life
  • There is ‘free money’ attached to each
  • The money you put into a LISA results in a 25% top up from the government
  • You have to actively invest this if you want
  • With a pension, your employer has to match what you put in and you also get tax relief on your pension

Is there a restriction on the type of property you can buy with a LISA?

Clare says:

  • It doesn’t have to be a new build
  • There are restrictions in terms of not being allowed to rent the property out
  • The hardest part is getting your money out again
  • If you take your money out for any other reason or before you reach 60 when access the money, you will lose the 25% uplift

 

What if you’re self-employed?

David says:

  • It depends on each individual
  • You may wish to pay into a pension, a LISA or both
  • It’s important to understand the tax relief of pensions and the benefits of both
  • They both have their place, but it is important to understand both and it’s an important decision

 

Is there much confusion about LISAs?

Clare says:

  • To a degree, yes
  • People are amazed when they realise they can get a 25% increase for free
  • They are also interested to learn there are many more types of ISAs such as cash ISAs and stocks and shares ISAs
  • People are most often confused about where and how to start
  • I think they are great for the self-employed and basic rate taxpayers
  • It’s also important to realise you have it for the long term and can’t access it until you are 60

 

Do you think LISAs will change?

Clare says:

  • They are likely to be tinkered with by the government
  • The take up wasn’t as high as they’d hoped
  • Many people cannot afford to invest much money into them
  • They do boost demand for property

David says:

  • I’ve seen lots of changes, such as to the Junior ISAs and Child Trust Funds
  • It’s important to understand what could change and why and how to protect your money as much as possible
  • It’s a good thing, however pensions are there too

 

Why are pensions so complicated?

David says:

  • The biggest complaint we get is that pension statements are difficult to understand
  • They are complicated and it makes them boring and uninteresting
  • People become disengaged from their money
  • People need to become interested in personal finance matters, which should start at school
  • Most people only find out the basics when they have to or when it’s too late

Clare says:

  • The Financial Times has just started up FT FLIC, an educational guide and we are lobbying to get financial education in schools
  • It is a financial literacy and inclusion campaign
  • You can find out more here: https://www.ft.com/ft-seasonal-appeal
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