New research has revealed taking out a Lifetime ISA will help you save for a first home more quickly and also give a vital boost to your pension pot. WEALTH at work, a provider of financial education in the workplace, has calculated that young people can save more quickly for a deposit on a house […]
New research has revealed taking out a Lifetime ISA will help you save for a first home more quickly and also give a vital boost to your pension pot.
WEALTH at work, a provider of financial education in the workplace, has calculated that young people can save more quickly for a deposit on a house with a Lifetime ISA than with a high street savings account.
It found that by achieving this earlier, they may actually increase the size of their pension pot.
The Lifetime ISA is set to be introduced in April next year and will allow anyone younger than 40 to put away up to £4,000 a year until they are 50. For every £4 people save, the government will give them back £1, a bonus of up to £1,000 a year.
It can be used by first-time buyers to fund a deposit for a property or taken tax free at 60.
However, although it’s been designed to help young people to buy a first home or save for retirement, there have been concerns that it will actually stop young people from saving into their pension.
Examples:
Sam – chooses to save £2,000 a year into his savings account at 0.5% interest. It takes 10 years for Sam to save his £20,000 deposit. Meanwhile he is also saving 9% through auto enrolment into his pension each year. In 10 years, his pension will grow to £35,000. Once he has saved his deposit, if he starts saving the £2,000 into his pension instead, based on the assumptions outlined above, he would have £415,000 in his pension by age 60.
Louise – chooses to save £2,000 a year into her Lifetime ISA. With the annual £500 government contribution added into the LISA, and 0.5% interest, it takes only eight years for Louise to save her £20,000 deposit – two years less than Sam.
Meanwhile, she is also saving 9% through auto enrolment into her pension each year. Following her house buy, she then starts saving the £2,000 she was saving into her Lifetime ISA into her pension instead. This amounts to an extra £5,000 in her pension by year 10 in just two years.
If Louise continues to save like this until she is age 60, she will have an estimated pension pot of £433,000. This is £18,000 more than Sam because she started with a LIifetime ISA initially.
| Savings | Sam | Louise (Lifetime ISA) |
| Time it takes to get house deposit | 10 years | Eight years |
| Pension pot after 10 years | £35,000 | £40,000 |
| Pension pot after 35 years | £415,000 | £433,000 |
By using the LISA, Louise gets the house two years earlier and gets a bigger pension pot. If individuals also find themselves paying less on their mortgage than what they were when renting property, this could then free up even more money up to go into the pension, resulting in even more in their pension pot.
Jonathan Watts-Lay, director, WEALTH at work, said: “There has been some concern that LISAs will stop young people from saving into their pension. However, I doubt if many people are currently saving into a pension at the expense of saving for a deposit on their first home.”
“We hope that these calculations, whilst obviously simplified to demonstrate the point, show that saving into a LISA can actually help young people to save for a deposit faster than using a savings account, and that by getting them into the savings habit, it may also actually increase their pension pot.”
