The lowdown on Lifetime Isas

21 February 2017

The Lifetime Isa (Lisa) could be worth considering if you’re planning to buy your first home or you want to kick-start your pension savings in your 20s and 30s.

The Lisa was launched at the start of the 2017/18 tax year and is aimed at first-time buyers and young retirement savers. Here’s everything you need to know.

What is a Lisa?

The Lisa is designed to help first-time buyers and people starting to save for retirement. When you pay into a Lisa, the government will top up your deposits with an annual 25% bonus up to a yearly maximum of £1,000. So if you save £2,000 over a year, the government will add £500.

As with other Isas, you can choose a Cash Lisa or an investment Lisa and once your money is in a Lisa it can grow tax-free.

Who can save into one?

I’m afraid if you are 40 or over, a Lisa will be of little interest to you. You can only open one if you are between 18 and 39 years old. If you have already turned 40 then you are not eligible for a Lisa.

Once you have opened a Lisa, you can save into it and continue to get the government bonus until you are 50.

How much can I save?

The annual limit on Lisa deposits is £4,000. If you deposit the full amount, you would benefit from an annual £1,000 government bonus.

Pay in the full amount each year from the age of 18 to 50, and you would bank £32,000 from the government. That annual £4,000 limit is quite low, but you are allowed to open a normal Isa alongside a Lifetime Isa and pay the rest of your Isa allowance (£20,000 in the 2017/18 tax year) into that.

Also, you will be able to transfer money into your Lisa from other Isas up to the £4,000 annual limit.

What can I spend the money on?

Unlike other Isas where you are free to spend your savings as you like, there are big restrictions on what you can use your Lisa money for. You can use your Lisa savings to help purchase your first home, but the property must be valued at less than £450,000 and you must have had your Lisa for at least 12 months.

If you don’t use the money for a property purchase, you can’t access it until you are 60 – so it is intended to be used to help fund your retirement.

It is worth noting if you are buying your first home, you don’t have to withdraw your entire Lisa balance.

You can leave some money and continue to save for your retirement. Another benefit of Lisas is that there is no tax to pay when you access your money.

What happens if I need my money before I’m 60?

It is possible to withdraw money other than for a first-time house purchase from your Lisa before you turn 60, but you will pay a hefty 25% penalty on whatever you withdraw.

The aim is to recoup the bonus you have earned from the government plus a small charge.

The only exception to the rule is if you are given less than a year to live, then you can withdraw the cash without penalty.

Is it good for first-time buyers?

A Lisa is a brilliant savings vehicle for anyone hoping to get on to the property ladder, as you will benefit from free cash from the government to help you. Plus a Lisa is an individual product, so if you are buying as a couple you can each use a Lisa. That means you could save up to £8,000 a year and benefit from a £2,000 a year cash bonus.

Pension or Lisa?

Unless you are self-employed, a pension remains a better choice for retirement savings than a Lisa. “Workplace pensions have the advantage over the Lisa as there will be an employer contribution as well as the tax relief. Pound for pound, that’s better value for your retirement savings,” says Danny Cox, a chartered financial planner at Hargreaves Lansdown.

But there are a couple of reasons why you should consider using a Lisa as part of your retirement planning. Firstly, if you are selfemployed you aren’t getting the benefit of employer contributions to your pension, but a Lisa would provide you with a 25% top-up from the government, slightly higher than the tax relief that basic-rate taxpayers would get on a pension.

Secondly, with a Lisa you can withdraw the full amount at 60 without paying tax on it. “This would be particularly attractive if you think you might be paying more tax in or around your retirement or want to draw the money while you are still in some form of employment or receiving some income,” says Adrian Lowcock, investment director at Architas.

However, if you are a higher rate taxpayer, you will get 40% tax relief on a pension, so it should be your first choice for retirement savings.

If you have maxed out your annual pension contribution allowance – the maximum you can pay into your pension and receive tax relief on each year is £40,000 – then a Lisa is a good overflow retirement savings option.

This is because not only do you get the government top-up on your Lisa, but when you retire you should use that money first to fund your living costs as pensions are subject to far better tax treatment upon your death.

When you die, the contents of your Isas – including the government bonus – and savings accounts count as part of your estate and can be liable for inheritance tax (IHT). But IHT is not paid on assets held within a pension. So if you want to hand on some of your wealth after death, you spend your savings first and leave your pension alone.

Who is offering Lifetime Isas?

As of 23 February 2018, Skipton Building Society is the only provider to offer the cash version of the Lisa - it pays 0.75% on savings. AJ Bell, Foresters Friendly, Hargreaves Lansdown, Moneybox, Nutmeg, OneFamily and The Share Centre are the major providers currently offering the stocks and shares equivalent. 

The AJ Bell Lifetime Isa has an annual platform charge of 0.25%, plus additional fund charges. This compares with a 0.45% yearly charge at Hargreaves Lansdown on portfolios worth up to £250,000, plus additional fund charges also apply.

Moneybox charges £1 a month and 0.45% of the value of your investments per year. Nutmeg investors face a 0.75% annual charge for fully managed portfolios of up to £100,000. It charges a lower 0.45% fee for fixed allocation portfolios. Additional fund charges again apply.

The Share Centre offers three funds for investors, depending on their level of risk. There are charges of between 1.69% and 1.82% on these, including its 0.75% annual management charge.

Elsewhere, OneFamily charges a 1% annual management fee - and you are limited to investing in two of its own funds - while Foresters Friendly Society has a 1.25% annual management charge, and you can only invest in its own fund.

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