Lifetime ISA (LISA)
The Lifetime ISA (LISA) started in April 2017 and lets you save up to £4,000 every tax year towards a first home or your retirement, with the government adding a 25% bonus on top of everything you save. That means you can receive an additional £1,000 of free cash annually.
LISAs can be invested in cash deposits or in investments, as is the case with conventional ISAs. Whatever interest or growth you earn is tax-free.
Written by Jonathan Wade
Director
Who can open one?
In a nutshell, those aged 18-39. For grandparents or parents wanting to help their (grand)kids buy a home, giving them cash to put in a LISA is a great way to do it.
For people nearing 40, it makes sense to open one before reaching that cut-off age, as once you are over 40, you can continue to put money into the LISA until the day before your 50th birthday.
How much can I invest in a LISA?
The rules say you can only save up to £4,000 a year in a LISA. But you could still open a cash ISA, stocks and shares ISA and/or innovative finance ISA for the remainder of your annual tax-free allowance of £20,000. For example, if you save the maximum £4,000 in the LISA, you've still got £16,000 worth of allowance to use up in one or more of the other types of ISA.
How does the bonus work?
The 25% bonus is paid every year (assuming you have also contributed) until you hit age 50. It is paid monthly and takes between four and nine weeks to arrive. Once in your account the bonus is yours, so you'll get investment growth/loss on it too. However, you only receive the bonus on contributions, not interest or growth.
The maximum bonus is £33,000 if you open a LISA at 18, and pay the maximum until age 50.
When can I use my cash and the bonus?
You can use the cash and bonus either when you buy your first home, or after you hit 60.
If you've owned a house before – whether inside or outside the UK – you can't use a LISA towards a home purchase. This includes owning a property, or a share of one, that you inherited, even if it was sold straightaway and you didn't live there.
To get the bonus you'll need to buy a property that costs £450,000 or less with any residential mortgage (not buy to let). That includes Right to Buy, shared ownership, self-builds, and Help to Buy loans. The LISA is intended to help you buy your first home, so you're not supposed to rent it out. You can get the money in time for exchange on your property, meaning you can use it towards the deposit requested by the person you are buying off (the exchange deposit), as well as the deposit the mortgage company will want on the property at completion.
If you put the money in a LISA and don't qualify to use it for a property (eg, the property you want is more than £450,000), you'll have to pay a penalty to withdraw it or you can keep it for use once you hit 60. So think seriously about whether this could happen to you first.
What if you keep your LISA until age 60?
You can access the cash on or after your 60th birthday, then use it for whatever you like. You don't have to take it all at once and you can make partial withdrawals. All money taken out of a LISA for retirement is tax-free.
If you leave it in the LISA it will still continue to accrue interest or investment growth/loss. The LISA doesn't simply stop at age 60; it will still be an active product.
LISA savings will affect your eligibility for benefits. Unlike a pension, which isn't counted as savings for means-tested benefits, the LISA will affect your eligibility for them. So you could have to pay to withdraw your LISA retirement savings and live off those until your savings are down below the means-testing threshold. Similarly, they count as assets in bankruptcy or divorce cases.
Can I transfer my LISA between Providers?
If you want to transfer it to a new provider, for example to get a better interest rate or investment fund , this is allowed – and then you can add to it. You just can't open another for new money only.
Summary
LISAs are an excellent way for parents and grandparents to build up a fund to help their children/grandchildren get on the property ladder. They are the most tax efficient means of achieving this aim, with the added reassurance that if the funds are not used for property purchase, they can continue to accrue with government bonuses to provide a tax free pot available from age 60.
At Watsons, we routinely use LISAs as part of families’ wider financial planning and have access to several competitive LISA contracts offering a wide range of investment options. Please feel free to contact us if you feel this may be of relevance to you.