What is a Lifetime ISA (LISA)?
The Lifetime ISA (LISA) was originally introduced by the government in April 2017 and was aimed at the younger generation of savers to help purchase their first home or fund retirement.
Since the launch, the take up has been disappointing and there has already been calls to abolish it from MPs on the Treasury select committee. Although this could be down to the LISA’s complexity, there are few providers offering it on the open market, so advertisement has been limited.
To be eligible to save using a LISA, you must be aged between 18 and 39. Individuals can contribute up to £4,000 per tax year into the product and the government will add £1 for every £4 saved. The maximum government top-up is £1,000 per tax year, which should be credited on a monthly basis.
Like a normal ISA all growth is tax free and you can hold the underling monies in cash or in stocks and shares. The LISA can be held alongside a normal ISA, but total contributions in the relevant tax year into ISAs should not exceed £20,000.
Where they differ are the withdrawal restrictions. If the underlying monies held in the LISA are not used to purchase a first home, or to fund retirement, then any withdrawal prior to age 60 incurs a 25% penalty. For example, if £4,000 is saved and the government boosted it to £5,000, you would end up with £3,750 once the penalty is factored in and you would end up with less than what you would have originally saved. The penalty was cut to 20% between March 2020 and April 2021 in response to the Coronavirus pandemic, which meant that you were only effectively losing out on the government’s contribution. However, since 6 April 2021 the full 25% penalty is back in force, so it’s best to try to only use the LISA if you’re sure the cash is either for a first-home purchase or holding it long-term for your retirement.
Other considerations include the maximum purchase price of the new property (must be less than £450,000) and the product must be held for a minimum of 12 months before it can be used to fund the new house purchase.
This article should not be construed as advice. Whether or not a LISA is suitable will depend upon your personal circumstances. Should you wish to speak to any member of our financial planning team about tax efficient savings vehicles or mortgages please contact our office on 01772 840421.