What is a Lifetime ISA?
Lifetime ISAs (or LISAs) are savings accounts that share some similarities to “regular” Individual Savings Accounts (ISAs).
They have existed since 2017 and can be useful for people looking to get onto the property ladder or planning for later life.
But, unlike other ISAs, they are not available to everyone, and they come with a number of strict rules.
- What is a Lifetime ISA?
- What are the rules for a LISA?
- How risky is a LISA?
- Is a LISA worth getting?
What is a Lifetime ISA?
A LISA is a tax-efficient long-term savings account aimed at younger people that can be used to help plan for retirement or to save for their first home.
At the moment, you can pay in up to £4,000 each tax year – and the Government will add a bonus of 25%. If you pay in the maximum amount each tax year, you’ll get an annual £1,000 top-up from the Government.
What is the difference between an ISA and a LISA?
There are a few key differences between ISAs and LISAs.
The annual limit you can pay into an ISA each tax year is currently £20,000. That is five times the current LISA limit.
Unlike with a regular ISA, the Government tops up your LISA contributions by 25%. But there are age restrictions on who can open a new LISA.
And while you can access a regular ISA at any point (subject to any notice period you might have agreed to), if you make an unauthorised withdrawal you will have to pay a penalty, which will be 25% of the amount withdrawn. At first glance, the fact you received a 25% bonus and would then be subject to a 25% penalty may seem to cancel each other out. Unfortunately, though, the maths doesn’t work like that.
What are the rules for a LISA?
There are some firm rules regarding eligibility for LISAs, and how they can be used.
- You can only open a LISA between the ages of 18 and 40
- You can pay in a maximum of £4,000 per tax year
- You can only withdraw from a LISA to pay towards your first home, when you reach 60, or if you are terminally ill and are estimated to have less than 12 months to live.
Once you have opened an account, you can add to it whenever you want (provided you don’t go over the annual limit on contributions).
Can I withdraw from a LISA at any time?
Technically, yes you can, but LISAs are not designed to be used for general saving, and you’ll be penalised if you make a withdrawal that isn’t for one of the reasons listed below.
There are only three occasions when you can access your funds without paying the penalty:
- When you buy your first property (up to £450,000)
- When you reach 60
- If you’re terminally ill, and have less than 12 months to live
If you take out your money at any other time, you’ll have to pay the Government a penalty worth 25% of what you are withdrawing. This allows the Government to recover the 25% bonus they have paid on your deposits, plus a little more to dissuade you!
So, unless it’s a genuine emergency, it’s not normally a good idea to withdraw your money until you reach one of the life stages that LISAs are designed for.
At what age can I open a LISA?
You can open a LISA once you turn 18, and at any time until you are 40.
Once you’ve opened an account, you can continue to pay in up to the annual limit (and receive the Government’s top-up) until you’re 50.
If you don’t use the money to buy a property, it will sit in the LISA until you are 60, which is when you can withdraw it without penalty.
Although the Government’s bonuses will cease when you stop paying in at 50, your savings can continue to grow for as long as they remain in the LISA account.
Can I invest in stocks and shares with a LISA?
Yes, you can opt for a LISA that invests in stocks and shares. This can mean that your money may grow more than a cash account would, but you should remember that you can also see the value of your investments fall – and that means you could ultimately lose money.
How long does it take to get money from a LISA?
It depends on the terms and conditions of the financial institution you’re saving with, but you should get your money soon after you request it – sometimes on the same day, depending on your provider.
Do you get charged to withdraw money from a LISA?
If you withdraw money to buy a first home, when you turn 60, or when you are diagnosed with a terminal illness and have less than 12 months to live, there’s no charge for withdrawing your money from a LISA.
In any other circumstance, you’ll have to pay an early-withdrawal penalty of 25% of the funds you are taking out.
How much can you save in a LISA each year?
The annual limit for LISA contributions is currently £4,000 (with up to £1,000 being added as the Government bonus).
Do you pay tax on a LISA?
No, you don’t pay tax to HM Revenue & Customs on any gains you make within a LISA. All the interest you earn or investment gains you make are tax-free, as is the case with regular ISAs.
Can a parent open a LISA for a child?
Unlike pensions for children, which can be started as soon as someone is born, LISAs are for people who are aged between 18 and 40.
Of course, there’s nothing stopping a parent giving a grown-up child some money that the child then puts into a LISA, but they’re not designed for parents to save money on behalf of their young children.
How risky is a LISA?
If you opt for a cash LISA, your money should be safe in the same way standard bank savings accounts are safe, and its growth will be linked to interest rates.
If you opt for an investment LISA, your savings will be based on the performance of the stocks and shares you’re invested in. Over a long period, there’s the potential for your investments to grow, but there’s also the risk that the value of your investments will fall, which is why you should take advice before investing.
Can you lose money in a LISA?
Yes, you can lose money in a LISA if it’s a stocks and shares account.
But remember that the Government tops up your savings with a bonus of 25% of whatever you invest, so even if there is a small fall in the value of your investments, the LISA might still be worth more than the money you yourself paid in.
You can also lose money if you withdraw without reaching one of the designated life events, because of the 25% penalty.
Is a LISA worth getting?
To decide whether a LISA is something for you, you should consider the key points that apply to the accounts.
- Government bonus: The largest benefit to a LISA is the generous Government bonus, equal to 25% of the amount you pay in. Under the current rules, the bonus is up to £1,000 every year, and that money can grow over several decades. If you open a LISA when you turn 18 and don’t make any withdrawals until you’re older, you could receive up to £32,000 of contributions from the Government.
- Understanding your goals in life: LISAs are designed to help with the purchase of your first home or with your retirement. So if you don’t intend to buy a property, or if you have already bought a home, you won’t be able to touch the money until you turn 60 (or fall seriously ill). If you want a savings account with more opportunities to access your money, a LISA might not be for you.
- Getting onto the property ladder: If you do intend to put the money saved in your LISA towards your first property, the home needs to be for you to live in – you can’t buy one and then rent it out – and it must not be worth more than £450,000. You must’ve also held the LISA account for at least 12 months before you can withdraw from it for a deposit. If you and your partner both have LISAs, you can combine them in a single purchase as long as you’re both first-time buyers. You can also use your LISA to buy a property with someone who has a Help to Buy ISA.
Is a LISA worth it for retirement?
If you pay into a workplace pension, that’s likely to be a better way to save for retirement than a LISA is as you will receive contributions from your employer. As a basic rate taxpayer though, you may only be receiving 20% tax relief. However, if you are already paying the maximum into your pension, a LISA can be a useful additional retirement fund. The minimum age for accessing a pension is currently age 55, but will soon be linked to the state pension age.
LISAs can also function as an alternative pension scheme for self-employed people.
Next steps
The important thing to remember is what a LISA 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 and state pension.
To speak to one of our experienced financial advisers about whether a LISA is right for you, or for general financial advice for young adults, call 01603 967967.
Please note, the value of investments and any income from them 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.
Tax benefits depend on your individual circumstances and the laws concerning these can change.
