We join Hargreaves Lansdown in calls for LISA changes for the self-employed

There’s no two ways about it – the self-employed are not saving enough of what they earn, and haven’t been for a long time.

IPSE has long called for action from both government and the financial services industry to address the self-employed pensions and savings crisis.

That’s why IPSE has teamed up with savings and investment provider Hargreaves Lansdown to back their calls for the Lifetime ISA (LISA) to be revamped and repurposed, with the aim of boosting the savings of self-employed professionals in a tax efficient way. Here’s how we’re proposing to do it.

What is the LISA?

Lifetime ISAs, while not directly designed for the self-employed, provide an additional financial tool to save for retirement. Account holders can pay in up to £4,000 every tax year up to the age of 50 and, in return, the government will increase any contribution by 25% (this is equivalent to basic rate tax relief in a pension).

If the money is withdrawn after the age of 60 there is no penalty or tax to pay, unlike a pension where the first 25% is tax free and the remainder is taxed as income. Particularly for those paying the basic tax rate, Lifetime ISAs can provide account holders with a more tax-efficient way to save.

Increasing the LISA age limit to 55

When it first launched in 2018, the age limit of 40 on opening and making initial contributions to a LISA immediately excluded 70% of the self-employed workforce.

This presents a problem for the self-employed, who are not only older than the workforce in general, but getting older; IPSE’s stats on the self-employed population in 2022 show that just under half (48%) of the solo self-employed population are aged 50 and over – with the proportion aged 60 and over having increased by 7 per cent on the previous year.

This leaves pensions as the primary savings vehicle available to freelancers over 40. But for self-assessment taxpayers who do not receive pension contributions from an employer, the relative benefits of saving exclusively into a pension appear lower – particularly for basic rate taxpayers.

Were it not for the prescriptive age limit, the LISA could offer a more tax efficient – and therefore appealing – means of saving for later life, with LISA funds incurring no tax penalty on withdrawal at retirement. In comparison, only 25% of pension funds are tax-free.

Reducing the early access penalty for self-employed savers

The second obstacle the LISA poses for self-employed savers is the early withdrawal penalty of 25%.

The argument could be made that the early withdrawal penalty serves to incentivise long-term saving, regardless of employment status. But the impact of this incentive is not felt equally between employees and the self-employed.

The self-employed typically need more fluid finances to respond to the challenges that working for oneself can throw up – whether it’s a client going bust before they pay their invoice, a lull in demand for their services, or equipment they rely on for work breaking down.

To feel comfortable putting money into a savings product, the self-employed need that product to be more flexible – and not to penalise them for withdrawing money to ensure business continuity.

Reducing the early withdrawal charge to 20% would remove the ‘penalty’ part of the charge; all they would lose out on is the government bonus, which is only payable upon retirement or on making a first home purchase. You can read the recommendations from the report in full below.

Changing the way the LISA works to better serve the self-employed requires a change to legislation.

That’s why, in addition to backing Hargreaves Lansdown’s recommendations ourselves, we’re asking for your help to raise awareness of the potential benefits of these changes in Parliament.

By writing to your MP in support of the proposals, you could make the difference in getting the message heard in the highest levels of government. To help with this, we’ve created a template letter for you to download and use.

If you believe a reformed LISA would help you to save whilst working for yourself, please consider writing to your MP and ask for their support.