The government’s latest product aimed at boosting saving by offering tax incentives launches in a few weeks, but is a lifetime ISA better than a pension for expats?
Making the financial decision is easier if you live in the UK, but for expats the tax consequences of ISAs and pensions are more complicated.
Most people believe they are expats when they leave the UK to live or work elsewhere for a prolonged time.
Leaving Britain does make them an expat, but that’s not the same as becoming a tax exile.
Tax and expats
And that’s the issue that hits saving into an ISA or pension. Living overseas as an expat is not becoming tax resident in another country.
A list of rules and circumstances are applied to determine tax residence, such as if you keep a home, bank account or other financial ties in the UK while living overseas. If you have not made a clean break and have no ties, then you might be UK tax resident.
If you are as an expat taking a prolonged break overseas, then saving into a pension or ISA means you can still claim any tax incentives the savings schemes offer.
Not qualifying as UK tax resident means losing those tax benefits, making investing in them less attractive when other specialist packages for expats may offer better benefits – such as transferring UK pension pots to an offshore Qualifying Recognised Overseas Pension Scheme (QROPS).
Savings boost
The Lifetime ISA or LISA allows anyone under 40 to save for their first home or retirement.
Savers can put aside £4,000 a year with a £1,000 boost from the government.
If the money is spent on a first home or kept in the LISA until the saver is over 60 years old, no tax is paid on fund growth. Any cash taken out early is subject to a tax charge of 25%.
A good money tip is open a LISA with £1 before the age of 40. This leaves the account open for 10 years regardless of if you save any more.
After pension contribution allowances are used up, a LISA offers an extra chance to boost savings without paying tax.
LISA is available from April 6, 2017.
