Lifetime ISAs Unpacked

The new Lifetime ISA (LISA), available since 6 April 2017, is a useful addition to the range of government-assisted savings products.

The opening of a LISA is restricted to individuals aged 18 to 39, but once you have one, you can save up to £4,000 each year up to the age of 50 – and receive a 25% government bonus on your contributions. On this basis, an 18 year-old who contributes £4,000 each year can receive a total of £32,000 in bonuses (£1,000 a year for 32 years).

What’s the purpose?

The LISA is intended to be a medium to long-term vehicle for saving towards retirement or the purchase of a first home. If you are saving for retirement, you can only withdraw funds free of penalty from the age of 60, or if you are terminally ill. When it comes to buying a first home, you can withdraw the money for a property worth up to £450,000 any time from 12 months after you first save into the account.

Any other withdrawals will incur a 25% charge, unless it is the closure of the account during a 30-day cooling off period. The first bonus will not be paid until April 2018, but thereafter bonuses will be added to the account monthly. Because of the delay in the first bonus, funds may be withdrawn during 2017/18 without charge, but the account must be closed and no bonus will be paid.

A LISA cannot be held in joint names, but two individuals can use their separate accounts towards the purchase of the same home. If each saves £4,000 in the first year, they will then have £10,000 towards their deposit – plus any interest. The home must be in the UK, bought with a mortgage and be where the purchaser will live.

Like other ISAs, funds may be held in cash or invested in stocks and shares. Savings in a LISA (though not the bonus) count towards the overall £20,000 annual limit on ISA investments. You can only open one LISA in any tax year.

Saving for retirement

As a means of saving for retirement, a LISA is very different from a pension. There is no tax relief on savings (although the bonus is equivalent to 20% basic rate tax relief) and employers cannot contribute. The maximum lifetime investment in a LISA is only £128,000 (£4,000 a year for 32 years) – less if you are over 18 when you open the account. There is no tax to pay on withdrawals from a LISA, whereas pension income is taxable apart from the 25% lump sum. On death, a LISA forms part of the estate, unlike pension savings. For many people it’s probably best seen as a supplement to a pension plan, not a replacement.

Don’t forget Help to Buy

If you already have a Help to Buy ISA, you can transfer savings built up before 6 April 2017 into a LISA and still save an additional £4,000 in the year – but this is only during 2017/18. The whole amount saved will benefit from the 25% government bonus. You can save in both schemes, but you can only use the bonus from one to buy a home.

The Help to Buy ISA was launched on 1 December 2015 for UK residents aged 16 and over. It allows savings of up to £200 a month (£1,200 in the first month). Like the LISA, savings attract a government bonus of 25% but this is capped at £32,000. Savings can be accessed after three months, but can only be used to buy properties worth up to £450,000 in London and £250,000 elsewhere in the UK.

Only three providers were ready to offer the new LISAs at their launch date. However, for most savers – apart from those approaching their 40th birthdays – there is no rush to open a LISA early in the tax year because the 2017/18 bonus will be the same regardless of when funds are deposited. If you are looking at your various investment opportunities, then we are here to help.