Her name is LISA, and for every pound you save, she’ll make sure the government puts in 25 pence. Sounds relatively simple, right? Unfortunately, that couldn’t be further from the truth…
The Lifetime ISA (ubiquitously known as the LISA) was launched on the 6th of April 2017. Essentially a savings scheme targeted toward the Millennial generation, it can be used to put money away for a house deposit, or to use in your retirement.
Whilst that may sound pretty straightforward in theory, the host of conditions, stipulations and strict rules that accompany the LISA make it a tricky road to navigate.
What exactly is a LISA?
If it looks like an ISA, swims like an ISA and quacks like an ISA, then there is only one thing it can be. An ISA! The LISA possesses a familiar tax-free wrapper, and comes in recognisable Cash and Stocks & Shares formats.
That’s where the similarities end. The key things to bear in mind are:
- Only those people aged between 18-39 can open a LISA. Therefore, in the 2017/18 tax year, the cut-off point is anyone born before the 7th of April 1977
- Contributions can be made until you are 50
- Up to £4,000 can be saved each year (that’s taken out of your £20,000 ISA allowance so you can save a further £16,000 in an alternative ISA if you wish to do so)
- A bonus equal to 25% of your contribution will be added by the Government
- The savings can only be used, without penalty, as a deposit on a first home, or after the age of 60
Technically, the money held in a LISA could be used for something other than a first house or retirement. However, this would incur a penalty of the interest accrued, as well as forfeiting the Government contributions.
Buying a first home
Announced in the 2016 Budget, the LISA was promoted by the Government as the ideal product for helping the Millennial generation buy their first home. The 25% Government top-up is a much-needed boost for many first-time buyers, especially with the average deposit for a first home now being over £30,000 (Source: Halifax).
The conditions for buying a first home with a LISA are as follows:
- You must not already own a home in the UK
- The property you buy must be priced under £450,000
- Your LISA must have been opened for over 12 months
- You must use the LISA as a deposit, and take out a mortgage
Because a LISA is still an Individual Savings Account, it means that if you are buying a house with a partner or spouse, you can effectively double up your savings. Providing, you are both first time buyers. If one of you already owns a home, then only one LISA will be eligible.
The LISA is available in both Stocks & Shares and Cash versions. It is expected however that most first-time buyers will choose the Cash option, especially if they will only be saving for a relatively short period.
Can a LISA compete with a pension?
There are key differences between a LISA and a Pension so it’s hard to give a definitive answer.
Differences include access; a LISA can be accessed for retirement purposes, without penalty, from the age of 60, whereas you can have access to a pension from 55. In terms of tax when withdrawing money; up to 25% of a pension pot can be taken tax-free, whereas a LISA benefits from the usual ISA tax wrapper, meaning the whole sum won’t be taxable.
So, is the LISA a viable retirement option? That depends on your individual circumstances.
Employees: Access to a workplace pension will, in all likelihood, mean employees are better off joining that, simply because it will benefit from an employer contribution, not available to the LISA.
Employees without access to a workplace pension: Auto Enrolment means that most employees will have access to a workplace pension. However, some low earners, including the millions on zero hours contracts may not be eligible. The LISA, with the ability to take money out to fund a house deposit, may therefore be an attractive option to this group.
The self-employed: By definition, people who work for themselves have no access to a workplace pension. Again, they may be attracted by the LISA although, with tax-relief on both options being the same, a pension, with its higher allowable contribution levels, may be more appropriate for those people saving seriously for retirement.
What to use it for
If you are hoping to buy your first home, and you meet the criteria, then the LISA should definitely be used to save for a deposit. There are very few no-brainers in life, but the Government contribution could make a huge difference to your savings.
If you are saving for retirement, joining a workplace pension, which receives a much-needed employer contribution, will almost certainly be a better bet than the LISA. However, if you are self-employed, or don’t, for whatever reason, have access to a workplace pension, the decision is a tighter one.
Here to help
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