I am a fully qualified mortgage broker with the CEMAP qualification and I am also a fully qualified financial adviser with the DipFA qualification. I offer an up-to-date approach when advising on pensions, savings and investments and also tax planning.
Deciding whether a Lifetime ISA might be for you, isn’t always easy. Once you make a decision you can be locked into a product until retirement or facing penalties from withdrawing your own funds. Therefore, it is important that you fully understand what a LISA is and what it can do for you so you can make an informed decision.
Below, we look in more detail around the features of LISAs, including the benefits and drawbacks and more:
What is a lifetime ISA (LISA)?
Lifetime ISAs are tax-free savings accounts that can be used for saving for a deposit on your first home or retirement. There is a 25% government yearly bonus on contributions which is capped at £1,000 and an annual limit for contributions of £4,000. You can open a lifetime ISA between the ages of 18-40 and make contributions until the age of 50. LISAs can either be cash or stocks and shares. Although tax free, LISAs can affect eligibility for some means-tested benefits.
Using a LISA for my first home
If you are a first time buyer and would like to save for a deposit on a house with a value of no more than £450,000 which you intend to live in, a LISA might be for you. Also, to fit the criteria for the government bonus, it must be on a traditional repayment mortgage.
How can I maximise contributions to save for a deposit on my first house?
To take full advantage of the contribution limits at 18 years old, you could contribute £333 per month (£3,996 per year), plus interest and the 25% government bonus, which would amount to £5,022 savings per year. Assuming that you save for 5 years, you could have a deposit for your first home of £25,110. This can be used for a deposit on a house worth £250,000, assuming affordability criteria by the lender is met. If you would like a house worth more than this, you could contribute with any other available savings for capital to supplement the deposit or save for longer. It is important to remember that there is a cap on the value of the house you can buy to receive the bonus and this is at £450,000. In this calculation I have assumed the use of a cash ISA. Investment growth could vary if it was a stocks and shares ISA.
Using a LISA to supplement my retirement fund
You can use a LISA to assist you when saving for your retirement. This doesn’t replace the need for a pension and should be used to supplement your retirement fund. You can contribute until the age of 50 and it enables access at age 60 (unless diagnosed with a terminal illness or money is used to buy first house). There is no capital gains tax or income tax on savings or interest.
How can I maximise contributions to save for my retirement?
It is important to remember that the earlier you open and start saving for retirement the larger your fund will be at retirement due to the annual bonuses on contributions. For illustrative purposes, let’s say you started saving into your lifetime ISA at age 30 and wanted to start saving the maximum at £333 per month towards your retirement. As you can only contribute until age 50 and receive the fund at age 60, this gives you a term of 20 years to save. If you were to save £333 per month (£3,996 per year), in the first year you would have an amount of £5,022 including interest and the government bonus. If you continued to contribute at this amount for 20 years, you could have a fund of £123,366 which you can access without a penalty at age 60. This is assuming that you used a cash ISA.
What if I need to access the money early for a reason other than my retirement or first home?
Lifetime ISA withdrawals are tax-free if:
Proceeds are used to purchase first home under £450,000
Transferring LISA to another provider
If you needed to access money for a reason other than the above, you are usually charged a penalty of 25%. However, until 5th April 2021 this has been cut to 20%, effectively taking off the bonuses accumulated and you get back what you have put in (assuming it is a cash ISA).
Benefits and Drawbacks of the lifetime ISA
This can appeal to a wide range of people as you can either invest in cash or stocks and shares. This makes it attractive to many different types of investors with varied investment experience. For example, investors who are looking to invest long term for their retirement may wish to take more risk. In comparison, someone saving for their first home may want the peace of mind that their LISA fund value cannot drop in value.
The 25% yearly government bonus.
The 25% government yearly bonus is arguably the biggest advantage of the LISA.
You can benefit from compound interest. This means that you also receive interest which adds to your total and then you earn interest on it too. You can transfer to other providers, meaning you can shop around and look for better investment returns or reduced charges if you wish.
Help onto the property ladder
A LISA can be a useful tool to help you onto the property ladder and can enable you to save faster for a house and potentially more. It is useful to bear in mind that these can only be held by one person. However, a couple can both have a LISA and use both of their savings and bonuses to contribute to the deposit.
You can still pay into other ISAs up to £20,000 (which includes £4,000 LISA allowance)
LISAs count towards the total ISA annual allowance
ISAs have an annual contribution limit of £20,000 and the LISA annual allowance of £4,000 counts towards this leaving you with £16,000 for any other if you were to use all of your allowance for the LISA.
House Value restriction
You can only receive the 25% bonus if the house you’re purchasing has a value of less than £450,000.
There is an exit penalty if you were to withdraw money for any reason other than retirement or buying your first home (unless terminally ill).
The type of house purchase that is eligible
This only benefits those who plan to live in the property and have a repayment mortgage. Anyone with a buy to let or interest only mortgage cannot receive the government bonus.
Eligibility to means tested benefits
Lifetime ISAs can affect your eligibility for means tested benefits. It is always a good idea to speak with an advisor before you take out a lifetime ISA.
Deciding whether or not to take out a LISA can be difficult and confusing. Once you make a decision, it could see you locked into a product until retirement or facing penalties for withdrawing your own funds. But it does give you the chance to get on the property ladder, benefiting from a 25% government bonus. It is therefore important to ensure you fully understand the product and that they are suitable for your needs and objectives.
Seeking financial advice can help make a tough decision easier.
If you are considering opening a LISA and need assistance with deciding which and opening one, please contact us and we will be happy to help.