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New low cost investment lifetime Isa launches: is it better than a pension?

Find out which is the best savings option to fund your retirement

New low cost investment lifetime Isa launches: is it better than a pension?

A new stocks and shares lifetime Isa has launched with one of the lowest platform fees on the market. With just a few weeks before the end of the 2019-20 tax year, should you invest?

Digital investing platform EQi, previously known as Selftrade, introduced the new account on 2 March 2020. It’s the 11th stocks and shares lifetime Isa to launch since April 2017, and the 16th lifetime Isa option overall.

Lifetime Isas, which are designed for first-time buyers and those saving for retirement, offer an additional 25% government bonus on top of what you save – up to a maximum of £1,000 in each tax year.

If you’re saving for retirement, you’ll be able to access your money at 60, but is a lifetime Isa any match for a pension?

Here, Which? reveals what the EQi lifetime Isa offers, and weighs up which savings option could best fund your old age.


What does the EQi lifetime Isa offer?

EQi is a digital investing platform, which also offers Sipps, stocks and shares Isas and dealing accounts.

New customers who open an EQi lifetime Isa will be given a complimentary dealing account.

Investments

Any Isa-eligible investments can be made with the lifetime Isa, including:

  • stocks and shares;
  • exchange traded funds (ETFs);
  • funds;
  • government bonds;
  • investment trusts;
  • Initial Public Offerings;
  • international securities.

You can buy investments as a one-off, or set up regular investments.

Low fees

EQi charges a market-leading custody or platform fee of 0.2% per annum (capped at £10 per quarter), and new customers get a ‘payment holiday’ for the first two months, where they won’t have to pay this fee at all.

However, there are other fees to be aware of:

  • Share dealing commission: £10.99
  • ETF dealing commission: £9.99
  • Fund sales: £10.99
  • Postage fee per communication: £1.20
  • Copy of consolidated tax certificate: £18
  • Copy of contract note: £12
  • Copy of statement/valuation (per item): £12
  • Chaps fee: £35
  • Faster payment: £20
  • Admin fee for an overdrawn account: £15

Existing customers with an EQi Isa, Sipp or dealing accounts won’t have to pay the custody fee on a lifetime Isa.

You can see how these fees compare against other stocks and shares lifetime Isas in our lifetime Isa guide.

Minimum contributions

You can open the amount from £1, and subsequent deposits can be made as one-off payments or a direct debit.

Existing investments cannot be added, only cash. Therefore, any investments must be sold before the cash can be moved to the lifetime Isa account.

Transfers

Only cash transfers can be made into an EQi lifetime Isa – that includes cash lifetime Isas, or stocks and shares lifetime Isas once all investments have been sold.

Other Isas, including cash and Help to Buy Isas, can also be transferred, as long as they do not exceed the maximum £4,000 annual lifetime Isa deposit allowance.

Find out more: how to transfer your cash Isa

Lifetime Isa pros and cons

If you’re thinking of saving for retirement with a lifetime Isa, the stocks and shares options are better suited to long-term saving. Many accounts say they should be taken out for at least five years, so that any bumps in the stock market have more time to recover.

While any provision for funding your retirement is a good thing, how does the lifetime Isa measure up to more traditional pensions? We’ve looked into the pros and cons of both options.

Pros

  • Your savings will benefit from 25% government bonuses: this is in addition to any interest or growth, which can be a massive boost to your savings pot.
  • Can be a good option if you’re self-employed: or for anyone who doesn’t qualify for a workplace pension – if you can’t get employer contributions, at least you can get the government boost.
  • It’s possible to access your saved cash early: while the withdrawal penalty will cost you, it’s possible to access your savings before you turn 60 if you really need to.
  • You can choose your provider: this often isn’t possible with workplace pension schemes, as companies will only be signed up with certain providers.

Cons

  • You can’t pay in any money after you turn 50: that means there’s a gap of 10 years where your cash will only grow from AER interest or investment growth. This is also a time when a lot of savers are able to put away bigger sums of cash and are more inclined to plan for their retirement.
  • You can only pay in up to £4,000 a year: or £333.33 a month, which is quite restrictive if you have more cash you’d like to save.
  • Early withdrawals are subject to a 25% penalty: that’s the government bonus plus 6.25% of your own money. The only time you won’t be charged to withdraw early is if you’re diagnosed with a terminal illness.
  • Savings will be included if you apply for benefits: savings held in a pension won’t be taken into account when claiming means-tested benefits like Universal Credit, but lifetime Isa savings are – and therefore may reduce the benefits you’re entitled to.
  • There aren’t many providers to choose from: the EQi account is the 16th lifetime Isa account, whereas there are considerably more options for Sipps and other personal pensions.

Pension pros and cons

Pros

  • You can use the pension freedoms: from the age of 55, you can withdraw all of your pension in one go, buy an annuity or go for income drawdown.
  • You can pay in more money: the pensions annual allowance is £40,000, or up 100% of your income, whichever is lower – so, up to 10 times more than you can pay into a lifetime Isa each year.
  • The benefit of employer contributions (for workplace pensions): under the current auto-enrolment pension rules, workers contribute 5% a month and employers add 3%, to give a total 8% contribution every month. Depending on how much you earn, this could exceed the government lifetime Isa bonus.
  • You can make pre-tax contributions: if you have a workplace pension, contributions can be made before income tax and National Insurance contributions (NICs) have been taken. This has the effect of reducing your overall tax bill, as such salary sacrifice measures reduce your income.
  • You don’t have to wait until you’re 60: personal pensions and Sipps are accessible from the age of 55, whereas lifetime Isa savings will be locked up for an additional five years.
  • Your investments will change as you get nearer to retirement: most pension providers will reduce the risk of your investments as you near retirement, switching to lower-risk options and cash to ensure your pension isn’t affected too much by any market dips.

Cons

  • Pension income is liable for income tax: while your contributions can be tax-free, you may be charged income tax when you receive your pension – and you’ll also have to think about the tax charged on taking out any lump sums.
  • You can’t access the money early: currently, the earliest you can access cash held in personal pensions and Sipps is 55 years old, with no options to access it sooner.

The government has previously said that the lifetime Isa shouldn’t be used as an alternative to a pension – particularly if you qualify for employer contributions – but as a supplement to it.

So maybe the answer is having a combination of both.

Find out more: lifetime Isa vs pension

What is a lifetime Isa?

Lifetime Isas launched in April 2017; they’re tax-free savings products that can be opened by anyone aged 18-39.

There are both cash and stocks & shares options, and anything you save gets an additional 25% government bonus, which is paid monthly (although it was paid annually until April 2018).

You can pay in up to £4,000 a year, meaning you could get up to £1,000 in government bonuses – in addition to any interest. Lifetime Isa deposits will be taken out of your overall Isa allowance.

You can only use the cash on certain things. First-time buyers can use the money to buy their first home, but the property must be in the UK and cost up to £450,000.

Alternatively, you must wait until you turn 60 to withdraw the cash. At this time, you can spend it however you like.

Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms & conditions of a provider before committing to any financial products.

Categories: Money, Savings & Isas

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