You’ve heard about it, but what actually is the Lifetime ISA?
The Lifetime ISA is a savings account that the government has promised to ‘top-up’ if you pass a certain set of hurdles. Much like other ISAs, it is tax-free savings.
It is specifically set out to help you with your first home or your retirement plan.
The government will top up the savings account with a 25% yearly bonus on [up to] a maximum of £4,000 each year. That is a maximum of £1,000 each year that you can get for free from the government. What’s the catch? Let’s have a look . . .
1. 300,000 people between 18 and 39 have opened once since it went live
The Lifetime ISA went live 6th April 2017. The scheme was announced in the spring budget, from the UK government, in spring 2016 as another means of encouraging the country to save more for their pensions or help them get on the property ladder.
The initial launch of the Lifetime ISA was nothing to write home about and it hasn’t really got too much better. It is a fantastic product but there seems to be a mixed response by the banks themselves and the average individual will only take out savings account with their existing banking provider.
2. Keep it in cash or in stocks and shares
You can hold your LISA in the form of cash (which will be protected under the deposit protection scheme) or investments in stocks and shares.
Remember that there is already a Stocks and Shares ISA, which provides a tax wrapper for your shares. The only difference, as explained in this article, is that the LISA has the 25% bonus from the government – if you pass the hurdles.
If you are investing for your retirement, then you should consider investing this money into stocks and shares, as this is a very long-term time horizon and the stock market is the highest yielding asset over any 20+ year period. This should be used in conjunction with other savings mechanisms, like apps that help you invest small quantities.
However, if you are intending to use your LISA for the other option, purchasing a house, you are better to leave it in cash. This is because there is less (zero) risk to your deposit depreciating. Whereas the stock market may crash in the few years you are saving for a house and you may actually finish with less money.
3. Penalties for disobedience
There is a penalty for early withdrawal (a.k.a. not using it for one of the two defined options).
What this means, is that if you don’t use it to buy a home AND you want to withdraw from it before you’re 60. You will end up being taxed on what you withdraw at 6.25%.
4. Unless you use it to buy a home, you cannot access it until you’re 60…
You can only use to buy a home that is worth less than £450,000. This is slightly better than the Help to Buy ISA, which only has this upper limit for London, with the rest of the country capped at £250,000. However, the Help to Buy can be opened by someone of any age.
The property purchase must be your FIRST house, you cannot have owned a house before. This is a very similar to the Help to Buy, it is just newer and has the same price cap for London and Rest of UK.
5. No high street bank is offering one
This is a slight catch. None of the large retail banks have ever offered the product.
The offering is mainly through building societies (like Skipton) or FinTech providers (like Moneybox).
6. It doesn’t pay you forever
The bonus ‘deal’ only lasts until your 50th birthday. Meaning that if you were to open one on your 18th birthday, the maximum bonus you could get is £33,000.
So it’s not really a Lifetime ISA.
7. You can’t get one if you’re over 40
Pretty self-explanatory. This is for us youngsters!
Having said this, if you open one on the day before your 40th birthday – you have successfully opened a Lifetime ISA and will be allowed to continue to invest and reap the government bonus.
Given that you are slightly closer to retirement, if you know that you will not need to access this money, you can literally guarantee a maximum of £1,000 for the 10 remaining years of your timeframe. This could be a great hack.
As I hope this article has shown– this is not the perfect savings vehicle. If you are already a homeowner and have other savings plans for retirement, this may not be the most efficient way for you to save and, hopefully, begin to invest.
Nevertheless, this is a good scheme from the government and I hope people are getting their bonus payments and putting them to good use!
Have a think about how the numbers would work for you, if you are currently using a Help to Buy, at least – this is very similar but with a higher bonus and house price cap.
Please let us know any questions in the comments and we will try to help 😊