The Lifetime ISA (LISA) first appeared in 2017, having been announced in the Budget the previous year.
It would be fair to say that they got off to a slow start. Few banks and building societies were ready to offer them on launch day, with many saying the product was too complicated. A BBC report at the time was quick to brand this as an industry ‘snub’.
Fast-forward three years and according to recent figures from FTMoney, over 400,000 people have taken out a LISA. However, the Telegraph reports that LISA holders have paid back ‘as much as £800,000 in penalties’, by taking their cash out early.
Here’s your guide to the pros and cons of a LISA.
What is a LISA?
Available to anyone between the age of 18 and 39, a LISA is an individual savings account in which investors receive an additional 25% of their investment from the government each year. The annual LISA Allowance is £4,000 and that means that you can receive up to £1,000 a year from the government.
Your invested fund – including the accumulated government bonuses – must be used to buy your first house or left invested until after your 60th birthday.
If you take your money out before the age of 60 or don’t use it to buy your first house you lose the government bonus, effectively paying it back as a 25% penalty.
The chance to get on the property ladder with help from the government will certainly account for many of the 400,000 LISA holders, but there might be downsides for some holders too.
Pros of a LISA
1. 25% bonus from the government
The most obvious benefit of the LISA is the 25% bonus from the government each year, on top of the £4,000 you can invest yourself.
The bonus is paid monthly, on contributions made during that month, and added to the invested amount. It then earns interest in the same way as your contribution.
The bonus is paid every year until you reach age 50. That means if you pay in your full allowance from age 18 until your 50th birthday, you will have received £33,000 in government bonuses.
2. Help onto the property ladder
Your investment in a LISA allows you to save for a house deposit whilst seeing your savings effectively ‘topped-up’ by the government.
If you’re a first-time buyer, looking to get onto the property ladder, a LISA might be a good option.
A LISA is an ‘individual’ account so couples will need to open one each but doing so will effectively double the government bonus you receive.
If you’re a first-time buyer but your partner is not, you can still use your own savings towards a house you buy together.
3. You can still pay into other ISAs
The annual ISA Allowance is £20,000.
If you invest in a LISA, your £4,000 LISA Allowance doesn’t replace the higher limit – but it is subtracted from it.
Use your full LISA allowance during a tax year and you can still invest up to £16,000 into any Cash or Stocks and Shares ISAs you hold.
4. You can transfer to another provider
If you take out a LISA you don’t have to stay with the same provider. You can shop around for better investment returns or reduced charges and transfer your LISA away if you choose.
Cons of a LISA
1. 25% penalty
If your plans change, or something unexpected happens, you might pay a penalty. Withdrawing money from your investment before you reach the age of 60, or not using it towards your first home, will result in a 25% penalty. This could mean you get back less than you put in.
The Telegraph reports an average penalty charge amongst LISA holders of £575.
When you take out a LISA, you’ll need to be sure that you intend to use the money for a house deposit or be sure that you won’t need it until you’re at least age 60.
2. Waiting until age 60
If you don’t use the money for a house deposit, or the house you buy falls outside of the allowed price range, you’ll need to keep your investment until you reach age 60.
You’ll need to know that you can do without the invested sum until that time. You might also want to consider your other pension provisions. Factor in your invested LISA amount but also ensure you’ve made the most of the tax efficiencies offered by pension products.
3. The age limits
You can only take out a LISA if you’re between 18 and 39. Taking out a LISA at age 18 will give you more years of potential government bonuses before you reach age 50, at which point they stop.
If you’re close to the upper age limit, you’ll need to consider whether the ten years of government bonuses make a LISA worthwhile or whether there are better investment options available to you.
4. £450,000 cap on a first home
Another stipulation when using your LISA to buy a first home is the upper cap on the cost of that house. You can’t use the money to buy a first home with a value above £450,000, which might mean missing out on the house you want, especially if you’re looking to buy in London or the south east.
Seek advice
Deciding whether or not to take out a LISA isn’t easy. 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.
Seeking financial advice can help make a tough decision easier.
Get in touch
If you’d like to discuss investing in a Lifetime ISA, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
