Your Money - Your Future
Getting the Best from a Lifetime ISABack 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.
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.
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.