A new type of ISA – the Lifetime Individual Savings Account, or LISA for short – is due to celebrate its first birthday on 6th April 2018.
The LISA is available to people aged 18 to 40, so if you don’t open one before your 40th birthday (or you were 40 on or before 5th April 2017), you will never be able to.
Savers can put away £4,000 a year into a LISA and will receive a 25% bonus – up to £1,000 a year – on top of their own savings. For example, if you put in £2,000, you will get a bonus of £500, making a grand total of £2,500 saved into your account. You should be aware that any money paid into a LISA also counts towards your normal ISA allowance, so if you pay in the maximum of £4,000, you’ll only be able to pay in £16,000 to your other ISAs.
The LISA can be used tax efficiently to purchase a first home or for retirement from age 60 onwards.
However, on no account should you opt out of a workplace pension scheme to invest in a LISA, as you will lose your employer’s pension contribution.
If you do open a LISA, you can continue to receive the 25% bonus on new contributions right up until your 50th birthday.
If you take money out of your LISA other than for the purchase of a first home or for retirement, you will suffer a 25% penalty of the total amount. Because of the way the maths works, you will get back less than you put in, even although the 25% penalty is the same percentage as the bonus. It works like this: you put in say £4,000 and get a £1,000 (25% of £4,000) top-up giving you a total of £5,000. If you take the £5,000 back out to pay for a holiday, you’ll suffer a £1,250 penalty (25% of £5,000) leaving you with just £3,750.
If you do intend to take money out other than for purchase of a first home or retirement, consider a normal ISA instead.
For retirement, LISAs are slightly more tax-advantaged than a normal pension, but only for basic and nil-rate taxpayers. However, unlike a workplace pension, you are not entitled to an employer contribution into a LISA. And, for higher rate taxpayers who pay basic rate tax in retirement, a normal pension is more tax-efficient. You can also take money out of a normal pension at age 55, whereas you have to wait until your 60th birthday to access a LISA tax efficiently.
That all means that LISAs are probably best used for saving up for a first home. If you take money out for this reason, and the value of the house is less than £450,000, you won’t suffer a penalty.
Although LISAs have now been around for a year, only a handful are available, so choice is limited. Most of the large providers have waited on the side lines to see how the market develops before launching their own LISA.
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