Getting the Best from a Lifetime ISA

Back to News & Views

Two of the most important financial goals are getting onto the property ladder and securing a comfortable retirement. Sometimes these goals are in conflict with each other, as the more you save towards a deposit, the less you have available to top up your pension.

Additionally, some investments are more tax-efficient than others and different types of assets carry varying degrees of risk. The right investment strategy can be tailored towards your goals, but this relies on your goals being clear.

The Lifetime ISA (LISA) was introduced in 2017 to bridge the gap between saving for a property and funding your retirement.

So how can a LISA fit into your financial plan?

What is a Lifetime ISA?

The LISA is effectively an ISA

You can invest your LISA contributions in cash or stocks and shares, or even a mixture of both. Cash is best suited to a short timeframe, as it won’t fluctuate, and there is less risk of losing your money. Stocks and shares are better placed for longer term investments. While this incurs more risk, the capital is more likely to grow and keep up with inflation.

Your LISA savings can be used to buy your first home, subject to the following conditions:

  •         The property must cost £450,000 or less.
  •         The purchase can take place any time from 12 months after first saving into the account
  •         The LISA can fund your deposit, but you are buying with a mortgage.

If you use the LISA to contribute towards the cost of a home, the LISA provider will pay the money directly to your solicitor or conveyancer, so you don’t actually see the cash.

If you don’t use the LISA to buy a property, you can also use the funds to provide a retirement income. After age 60, you can withdraw the funds without tax or penalty.

You can transfer your LISA to a standard ISA if you wish, but if you are under 60, this is considered an unauthorised withdrawal and penalties will apply.

Apart from the circumstances outlined above, the only way you can withdraw your savings without penalty is if you are terminally ill with less than 12 months to live or if transferring to another LISA with a different provider.

Who Can Contribute to a Lifetime ISA?

LISAs are open to UK residents and crown servants posted abroad.

You can set up a LISA at any time between the ages of 18 and 40.

Once the LISA is set up, you can contribute until age 50. The government will continue to top up your savings with a bonus until then.

After age 50, you can’t make any further payments into the LISA, and you can’t withdraw the funds without penalty for a further 10 years.

How Much Can You Pay in?

You can contribute up to £4,000 per year to your LISA.

The government will add a 25% bonus to your contributions, up to a maximum of £1,000. This means that your LISA can benefit from contributions of up to £5,000 per year.

Your LISA contributions form part of your overall ISA allowance, which is currently £20,000 per year in total.

Early Withdrawal

If you withdraw your savings, other than for one of the intended purposes, a 25% withdrawal penalty will apply.

While this is intended to reclaim the government bonus, you will actually be penalised in terms of your own savings as well.

For example, if you contribute £4,000, this will be topped up by £1,000 and you will have £5,000 in your account.

If you then opt for early withdrawal, the penalty will be 25% of £5,000, or £1,250. This means that you have lost not only the government bonus, but £250 of your own money as well.

If your investment has grown in value, the penalty will also apply to the growth and not just the original contribution amount.

You should think carefully before paying into a LISA as if your circumstances change and you need to access the money, you could end up worse off.

Pros and Cons

The main benefits of a LISA are:

  •         You receive a government top-up to your savings.
  •         All income and growth generated within your LISA are tax-free.
  •         You don’t have easy access to the money so it is less likely that you will be tempted to dip into your savings.
  •         If you are unsure whether to prioritise property purchase or retirement funding, a LISA allows you to work towards both at the same time.

However, some potential downsides are:

  •         You will pay a penalty if you withdraw the money early. This not only reclaims the bonuses paid, but also cuts into your own capital.
  •         The contribution limits are relatively low, which can mean it takes many years to save up a meaningful deposit for a property. You might need to add other funds to top up your deposit.
  •         The window of opportunity to set up and pay into a LISA is limited.
  •         The LISA is a relatively new concept, and replaced the previous Help to Buy scheme. Incentives change frequently and there is no guarantee that the scheme won’t be closed or replaced with something else.

Who Can Benefit from a Lifetime ISA?

You may be able to benefit from a LISA if:

  •         You want to eventually buy a property and build up a retirement fund, but are unsure which to prioritise first.
  •         You are fairly young, as this will give you the longest period to build up your savings.
  •         You have other money that you can access in an emergency.
  •         LISAs can also offer a solution for parents wishing to make gifts to their adult children, as it ensures that the money will be used for an approved purpose.

Other Options

A LISA is not the only option if you would like to save for a property and contribute towards your retirement. You could also consider:

  •         A standard ISA. This offers tax-free returns and penalty-free withdrawals. There is also no time limit on your contributions. Of course, most ISAs do not benefit from government bonuses.
  •         Help to Buy ISAs. These are no longer available, but if you have an existing one, you can still contribute.
  •        Pensions are the gold standard in terms of tax-efficiency. You receive tax relief on your contributions, tax-free interest and growth within the fund, and can even withdraw 25% of your pot without tax liability if you are over 55 (although the minimum pension age is expected to increase). Pensions can also be passed on to the next generation without any tax if you die before age 75. The main downside of a pension is that there is no scope to withdraw funds early unless you are terminally ill.
  •         If you are employed, it may be worth joining your workplace scheme as your employer may match your contributions (up to certain limits).

A Lifetime ISA can form part of your financial plan, but it works best when combined with other savings and investments.

Please do not hesitate to contact a member of the team to find out more about your investment and retirement options.

The value of your investment can fall as well as rise and is not guaranteed.

Book your FREE, no obligation discussion today. Schedule Appointment

Sign Up to our mailing list - Receive regular news, tips and financial commentary from the Gemini Team.

Latest News

  • After the excitement and excess of the festive season, January is a good time to make plans for the coming year. You still have three months left until the end of the tax year, which is plenty of time to make the most of your tax allowances. By doing some planning now, you can save tax and avoid the last minute rush in April. [...]

  • Creating your own financial plan is fairly easy and accessible. The internet offers budgeting spreadsheets, investment calculators, and trading platforms. Everything you need to plan your future and build a financially independent lifestyle is literally at your fingertips. [...]

  • Two of the most important financial goals are getting onto the property ladder and securing a comfortable retirement. Sometimes these goals are in conflict with each other, as the more you save towards a deposit, the less you have available to top up your pension. [...]

  • A secure pension income for life is no longer a reality for most people. While some retirees are fortunate enough to have built up a substantial defined benefit pension, the majority will need to manage their retirement carefully, drawing an income from a number of different sources. [...]

  • Insurance is an often neglected aspect of financial planning, especially when it comes to thinking about your estate. There are several options available for reducing Inheritance Tax (IHT), for example, making gifts, placing money in trust, or investing in business assets. [...]

  • We all want our children grow into successful and responsible adults. Passing exams and starting a career can help to get them on this path, but they don’t nurture many of the life skills we take for granted. [...]

  • If you read the financial press, you will see a lot of speculation about what you can, or should, invest in. Social media is no different, with stock tips and investment forums building up a significant online following. [...]

  • Many couples keep their finances separate, which makes sense in some situations. If both parties are financially independent and contribute equally, it can be a fair and sensible way of managing household finances. [...]

  • Remortgaging can be a useful way of improving your deal, raising additional funds, or restructuring your financial arrangements. [...]

  • As the Covid restrictions are gradually lifted, normality is starting to appear on the horizon. Throughout 2020 it was difficult to make plans for next week, let alone the rest of your life. But the new tax year, and the prevailing optimism, mean it is a great time to start planning and catch up on missed opportunities. [...]

  • The pandemic has caused financial hardship for many people, with multiple industries still facing uncertainty. But for those fortunate enough to stay in work, or be covered under the furlough scheme, there have been fewer opportunities to spend money. Long, sociable lunches, after work drinks and foreign holidays have been off the menu for over a year. While many of us might have splashed out on new tech, home improvements and leisurewear, the savings still add up. [...]

  • As you work towards financial independence, protection is an important part of the plan. Having the right insurance can mean that your financial plan stays on track, even if the unexpected happens. [...]

Gemini Wealth Management Ltd is Authorised and regulated by The Financial Conduct Authority Registered in England & Wales No. 5919877 Registered Office: Gemini House, 71 Park Road, Sutton Coldfield, West Midlands B73 6BT The Financial Conduct Authority does not regulate tax and trust advice, will writing and some forms of buy to let mortgages. The guidance and/or advice contained in this website is subject to regulatory regime and is therefore restricted to those based in the UK.

Website by Mellow Marsh Software
© Gemini Wealth Management Ltd
Privacy Notice | Cookie Policy