Everyone yearns for financial security in their old age – and the selfemployed are no different. They do, however, face unique obstacles in achieving it. Whether sole traders or working through their own limited liability companies, the self-employed, by nature, must endure fluctuating incomes and don’t benefit from an auto-enrolment pension like employees.
Something needed to be addressed. Last March, then-Chancellor, George Osborne recognised this and introduced the Lifetime ISA (LISA) designed specifically for “the next generation” which the Government is rolling out this month.
The memorably-titled LISA is just like any other ISA. In brief: It’s a tax-free wrapper around your savings (up to a maximum of £15,240 in 2016/17) and will be available to everybody, not just the self-employed, between the ages of 18 and 40.
The LISA is intended for one of two purposes - for those looking to buy their first home or put away cash until after you’re 60. Now for the number crunching. If you open a LISA, there is a maximum deposit rate of £4,000-a-year until the age of 50. Then the state will add an additional 25% bonus once you withdraw, on or after your 60th birthday. If you were to open a LISA on your 18th birthday, for example, and deposit the maximum £4,000-a-year until the age of 50, the maximum bonus would equate to £32,000. Your LISA can be used to purchase a house up the value of £450,000. This is an improvement on the Help to ISA, which could only be used on houses costing up to £250,000 if purchasing outside London.
You’re free to withdraw none, some or all of it, and anything you don’t withdraw still accrues interest. The LISA can be used in the same way as the Help to Buy ISA but allows additional savings of £1,600-a-year up to a much greater amount, deposit lump sums instead of regular payments and buy more valuable property.
Many industry experts have labelled it “free money” but it has drawn criticism in that it hopes to tackle too many issues – home ownership and retirement. Judgements of “confusing” by TD Direct Investing and “incompatible” by Aegon may not be too wide of the mark.
First, though, the positives. It’s welcome that Government is actively thinking of ways to encourage and support the self-employed, and the 25% bonus is certainly a very attractive incentive for them to begin saving. The fact that there is no minimum payment means the self-employed can pay into the LISA when it suits, rather than being tied in to structured payments. A flexible policy for a flexible workforce. The second fastest growing section of the self-employed workforce is the 18-25 age bracket and it’s a significant boost that they now have a vehicle for saving ahead of their retirement where, previously, there wasn’t one.
It sounds ideal for self-employed savers, but is it too good to be true?
It certainly isn’t without its flaws and a staggering 25% penalty on withdrawals is evidence of that! The fact that the average freelancer is already in their 40’s, but isn’t eligible, is also worrying. The Government would be well advised to increase the age eligibility so that those over 40 can secure their futures too. The maximum threshold of 40 is too low and prices out a large pool of potential users. Unfortunately, the LISA isn’t available from any national high street banks at the time of writing. Among some of the only recognised providers offering the LISA are investment services Hargreaves Lansdown and Nutmeg.
It’s recommended that you save half of your age, as a percentage of your earnings. If you open a LISA at 40, for example, you are advised to commit 20 per cent of their earnings. Increasing the £4,000-a-year deposit would further support the self-employed and reduce their reliance on other provisions such as the State Pension. A maximum deposit feels too restrictive, but must be accompanied by a lower penalty for withdrawal – selfemployed income can be volatile, increasing the likelihood of needing to dip in.
The LISA is a step in the right direction for the self-employed
For those who don’t qualify for the LISA, there are other options. From April 2016, the selfemployed will be entitled to the State Pension in the same way as employees. This is a welcome safety net, but by no means sufficient for a comfortable retirement.
For this, the self-employed need additional and appropriate long term investments. IPSE members have access to our IPSE Futures pension deal, which offers group rates for a variety of flexible benefits at a fraction of the cost you would pay as an individual, including pensions.
Far from being perfect, the LISA is a step in the right direction for the self-employed in allowing them to secure their future – in terms of both pension savings and home ownership. It is, without a doubt, a wellintentioned vehicle for saving but needs a gentle steer before it can be considered truly road-worthy. IPSE will be working to make sure Government does all it can to support this dynamic, booming group that is so vital to the UK economy.