This coming weekend, take a second to look at the personal finance section of your Sunday paper. Chances are, you’ll spot an article or opinion piece about the Lifetime ISA.
Also known as LISA, this new product was unveiled by HM Treasury in 2016 and is due to launch in April this year. Designed to help savers buy their first home, or as an alternative to a pension, the Lifetime ISA should be available through all the usual savings account providers.
Join us as we take a look at both the rules and the benefits, so you can start to weigh up if it’s for you.
The product’s strongest card is the generous government bonus, equal to 25% of the amount you pay in. Because savers can deposit up to £4,000 per year, the bonus could potentially be worth up to £1,000 in free money every year. You can open a LISA between the ages of 18 and 40 and can pay into it until the age of 50. If you pay in the maximum amount of £4,000 every year from the age of 18 onwards – and don’t withdraw anything until you’re over 50 – you could earn an extra £32,000 from the government.
As stated above there are some strict Lifetime ISA rules around accessing your savings. These could be considered complicated and there are many opportunities for the unwary to fall foul of them.
Getting onto the property ladder
The most important rule to consider is that your LISA can only be spent on buying your first home or as a retirement sum. In the first case, you cannot use a LISA to buy property if you’ve owned one before, and you can only buy property up to a maximum value of £450,000. Furthermore, the property must be for you and your family to live in; you cannot use a LISA to purchase a property that you intend to rent out. If you and your partner both have LISAs, it’s possible to combine them on the one purchase.
Your LISA can only be spent on buying your first home or as a retirement sum
If you’re using your Lifetime ISA as an alternative to, or in conjunction, with a pension, you can spend it on whatever you want. However, you can’t cash it in until you’re at least 60 years old. If you’re able to pay the maximum contribution to a workplace pension, a Lifetime ISA can act as a back-up nest egg.
Like most ISAs, the LISA can be made up of either cash investments, or stocks and shares. In the former case, a cash LISA will pay out annual interest at about the same rate as other ISAs, where the top rate is currently around one per cent (at the time of publication). As with other ISAs, if you choose the stocks and shares option then you could see a potentially higher return, but you’re also at risk of the value decreasing. Like any other ISA any increase will be tax-free.
How does it compare to other ISAs?
The Lifetime ISA is most similar to the current Help-to-Buy (HTB) ISA and is meant to take the place of the latter.
The Lifetime ISA is most similar to the current Help-to-Buy ISA
As mentioned before, the upper value of the house or flat you can buy with a LISA is £450,000; with a Help to Buy ISA the limit is £250,000, or £450,000 in London.
You can only put £2,400 per year into a HTB ISA, compared to £4,000 per year for a Lifetime ISA. And while the HTB ISA also comes with a government bonus, the maximum amount is £3,000, which is only paid when you withdraw your money to buy a house. Because the bonus is paid into your LISA every month after the first year, you can see your savings rise and earn interest on the full amount.
LISA exit charges
These will put you at a disadvantage if you buy a home within the first year of having a LISA before your first government bonus has been awarded. In that case, you’ll miss the extra cash completely. Similarly, if you want to withdraw your money before the age of 60, for any other reason than you’re buying your own home, then you could face a considerable exit fee. This will be equal to 25% of your total savings. In theory, this represents paying back your government bonus, but in reality it could leave you with less than you paid in.
For all the talk of how complicated the Lifetime ISA rules are, they’re actually relatively straightforward. The important thing to remember is what this ISA can and cannot be used for, and to treat it as a long-term investment. The sooner you start paying in the more you’ll have available when you need to put down a deposit on your own home, or when you retire with a comfortable nest egg to supplement your workplace pension.
LISAs can also function as an alternative pension scheme for self-employed individuals. The early exit charges are steep, but they’re necessary to stop the generous government bonuses from being misused.
As always, get in touch if you have any queries about whether the Lifetime ISA is right for you.
Please note, the value of an investment and any income from it can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.
The value of tax benefits depends on your individual circumstances and the laws concerning these can change.