The Lifetime ISA (LISA) came to fruition in 2017, amid a slightly lackluster reception. When the LISA was released, very few providers decided to offer a LISA product. Frankly, the selection for savers was poor. However, a few years on and things have changed somewhat. The market for LISAs has grown and the rates offered between banks has improved due to competition.
Now you ask – what is a Lifetime ISA and will it benefit me? Lucky for you, The Base Rate have compiled this fantastic guide on the LISA. We cover the pros, the cons, and of course the key rules that need to be met to open an LISA. If you want to check out different types of ISA, including Lifetime ISA providers, check out our guide here.
What is a LISA?
The LISA is a tax free wrapper (much like a standard ISA) that allows you to deposit up to £4,000 per tax year. You can invest the ISA in cash (and earn some interest) or in stocks and shares (and benefit from any gains in share prices and dividends). The LISA is designed for two separate life events – buying your first home and retirement (post-60).
You should carefully consider your investment approach to each of these events. It is likely that you will have a much shorter investment horizon for a first house purchase when compared to retirement. The former would generally be better suited to a cash LISA and the latter more suited to a stocks and shares ISA. However, if uncertain, you should seek financial advice specific to your circumstances prior to making any investment decisions. The best part is the LISA is flexible. That is, if you decide not to use the LISA to buy your first home, you can then choose to keep it open and save for retirement.
How do I get £33,000 of free cash?
Well, to get the full £33,000 of cash you would need to open a LISA aged 18 and invest the full amount each year until aged 50. However, the government give all LISA holders a tax free bonus of 25% of the amount they deposit each year. So if someone makes a contribution of £4,000, the government will top this up a further £1,000. This makes the total contribution £5,000. There are now a wide range of Lifetime ISA providers on the market, each with different rates. It chooses to shop around to get the best rates to make the most benefit of the bonuses.
Who can open a LISA?
Put simply, anyone aged between 18 and 40 years of old. First-time buyers using the LISA to buy a property must carefully consider some specific rules that apply.
What are the rules for first time buyers?
You must be a first time buyer. That means you must not have owned a property anywhere in the world before. If you have, you cannot use the LISA to acquire a property.
You must buy a property that costs less than £450,000. This can include right to buy or any standard residential mortgage. If you are buying a property as a buy to let, unfortunately this does not count as a qualifying purchase.
The LISA needs to be open for at least 12 months prior to using your funds to buy a house. So, deposit those funds in a LISA as soon as you can. There are numerous Lifetime ISA providers to choose from.
There’s no such thing as a free lunch…
The penalty.
As we mention earlier in the article, you can use the LISA for buying a property if a first time buyer. Or alternatively, for retirement. If you want to take money out for a reason other than this, you’ll need to pay a penalty. That is unless you are diagnosed with a terminal illness or upon death. The penalty is 25% of the value of the withdrawal. Now this means you forfeit more than the 25% bonus due to the way the government calculate the penalty. We have explained this more easily with numbers below:
You want to withdraw £5,000 from your LISA. Of this £5,000, you contributed £4,000 and the government contributed a bonus of £1,000. However, on withdrawal, the Lifetime ISA providers withhold a penalty of 25% of £5,000, thus leaving you with a net balance of £3,750. In effect, you have paid back the bonus plus a further £250.
As we said, no such thing as a free lunch. But if you use the LISA for the two intended purposes, you receive a very healthy bonus each year!
Other tips and tricks
If buying a property as part of a couple or with a friend, each person is free and able to save into a LISA. Thus, an easy way to double your tax free bonus from the government.
You can invest in a LISA and other ISAs, whether a stocks and shares ISA, a cash ISA or an alternative finance ISA. If you invest the full £4,000 in the LISA, you are free to invest a further £16,000 in another type of ISA (for 2019/20).
Conclusion
In conclusion, a Lifetime ISA presents a remarkable opportunity for individuals aiming to save for retirement or purchase their first home. With generous government bonuses, tax-free growth, and the flexibility to use funds for a first-time property purchase or retirement savings, the LISA stands out as an attractive savings vehicle. However, it’s essential to be mindful of the specific rules and conditions, particularly for first-time buyers and those saving for retirement.