One of the biggest challenges for the self-employed is saving money. It’s always that much more difficult when there is no control or guarantee on how much income you earn. When work is scarce, or someone is late in paying their bill, it can create severe cash flow problems, making it even more difficult to plan how and when to save.
There are two big financial challenges that most people face in their lives. One is trying to get on the home-ownership ladder, and the other is saving for retirement. Both of these goals are that much more difficult for the majority of self-employed folk, and this is one of the reasons that the government stepped in earlier this year, by introducing the Lifetime ISA.
A lifetime ISA (or LISA as they are now being referred to) can only be opened by the saver. In other words you cannot open one for someone else. You can open more than one LISA during your life, but you can only put money into one per tax year.
Basic facts about a LISA
The age for opening a LISA is anywhere between 18 and 39 years-old; however, statistically the average age of a self employed person is over 40. This means that in order to open the new product up to the majority of self-employed workers, the government would be well-advised to raise the age threshold.
Providing you open a LISA before the current age threshold, you can invest up to £4,000 per tax up until your 50th birthday. The only proviso is that you cannot exceed the total annual ISA contribution of £20,000 per annum. So, let’s say for arguments sake that you have already invested £18,000 into any other ISAs you have this tax year, you would then only be able to invest £2,000 into a LISA.
In a perfect world, if you were able to save the maximum amount permissible per annum from the age of 18 (towards buying a house or saving for your retirement) the government bonus or top-up would be £32,000 (tax free). However, if you don’t access the money to buy a property valued up to £450,000, or you take money out before you reach your 60th birthday without having bought a property, you’ll be hit with a 5% charge.
LISAs – the “go-to” pension vehicle for the self-employed
LISAs have been labelled the “go-to” pensions vehicle for the self-employed. At present, it is estimated that only about a third of self-employed people save into a pension scheme. It is the government’s aim to change that with the introduction of the LISA. But while the LISA is an effective vehicle, before you make your mind up whether or not it is the best vehicle for you and your own individual circumstances, you should review what other options are open to you.
All ISAs offer different advantages, and depending on your own personal circumstances and your attitude towards risk, you may decide for one of the other options, which include:
Basic ISA (cash and/or stocks and share)
Junior ISA (Aimed at children and young people below the age of 18)
Innovative Finance ISA
You might also like to consider robo investment. For people who haven’t got the time or inclination to get too heavily involved in the mechanics of their savings platform, a robo advice service could be the one for you.
Some people are wary about a completely automated robo-platform, but some robo advisors, like Moneyfarm for example, use their in-house human, expert advisors to check and augment the automated processing.
Lifetime ISAs however, are still very much a valid option, and if you are still considering taking one out, you might like to hear what TISA have to say.
Higher bonus recommended by TISA
Adrian Boulding, Policy Strategy Director for TISA (Tax Incentivised Savings Association) has said that the recently introduced LISA ticks-off all of the boxes laid down by TISA in terms of helping the self-employed, apart from one. They are of the opinion that the 25% bonus offered by government, should be raised to 50% for self-employed workers. This is in view of the fact that self-employed workers do not get the employer pension contributions that employed workers are given.
Levelling the playing field between the employed and the self-employed
The fact that LISA contributions are not mandatory, like other pension schemes, is an advantage to the self-employed who cannot guarantee what their earnings will be. As a voluntary option, it is believed that it will encourage self-employed people to save what they can afford, and if the bonus is ever raised, it will become even more attractive and will help to level the playing field between the employed and the self-employed.