The new Lifetime ISA (nicknamed LISA) launches in April 2017 – so what is it and could it be suitable for you? Here we take a brief look …
What it is LISA (the Lifetime ISA)?
This is a different type of Individual Savings Account (ISA) that is designed to help young savers with buying their first home as well as building up a pension pot.
It is being talked about a lot because the Government top up your contributions by a further 25% annually. So, you can put in up to £4,000 a year and will get a £1 bonus for every £4 you have saved.
Then, when you are ready to buy your first home, or once you are aged 60, the saved cash and bonus is available tax-free.
The overall ISA limit will be hiked to £20,000 from April 2017, with the Lifetime ISA falling within this. Savers aged under 40 in April 2017 can put money into pensions and Lifetime ISAs and get pension tax relief and the bonus.
How does it work?
- Firstly, you need to be aged under 40 in April 2017 to be eligible for this product.
- You can save as much as you want every month, with an annual limit of £4,000.
- If you are a first time homebuyer (buying a house up to the value of £450,000) then you can access your money and any bonus accrued at the time. The money will be paid directly to your mortgage lender.
- If you are already a homeowner or want to use the Lifetime ISA as a pension style pot, then the savings and the bonus can be accessed after you are 60 – all tax-free.
Are there any potential downsides to a LISA?
As the product has not even been launched yet, it is difficult to say if there are any downsides.
If you want to access your money early (not for home buying) or you want to cash in your LISA at any time before you turn 60, there may typically be fairly stiff penalties for making withdrawals from the Lifetime ISA.
- You will lose the bonus and any interest or growth.
- If you are a saver doing this, typically you may have to pay a 5% charge.
If you fall terminally ill and want to withdraw your money, you will be able to do so without penalty.
Can someone who is already a homeowner get a Lifetime ISA?
Yes, but you will not be able to use the monies to put towards a new home. You can access the monies when you hit 60.
- Even if you are already saving in to pension and are a homeowner aged under40, you can still get a lifetime ISA.
- If you are aged under 40, and are already saving into a pension and are a homeowner, you can still invest in a LISA
Is LISA for you?
If you are aged 40 or over in April 2017, you will not be able to invest in a Lifetime ISA – so even if you wanted to take advantage of ‘free’ cash, you couldn’t.
The Lifetime ISA offers a pension tax relief-style boost to a savings pot that can also be used to buy a first home, so it is an attractive option for young savers who are torn between saving for a first home or their pension.
Industrycommentators are promoting it as free cash of up to £32,000 – this is because if someone invested from the age of 18 until they were 50 and paid in the annual allowance of £4,000 every year (so, a total of £128,000 over 32 years) they would get £32,000 worth of bonuses.
If you are a young saver investing in a Lifetime ISA, you should not think that you have got their pension covered off too and avoid paying in to a company scheme.
There can be benefits to putting money in to a pension scheme too – some which trump the benefits offered by a LISA – so do seek independent professional advice to make sure you have all your bases covered.
Finally, please note that as the LISA has not yet launched, product features and benefits could change but are correct at the time of writing (April 2016).
Further reading: HM Treasury information on the Lifetime ISA