The Underrated ISA.
The Lifetime ISA (LISA)
This is a tax-free savings account that allows 18–39-year-olds to save up to £4,000 per tax year towards the purchase of their first home or for retirement and benefit from a 25% top up from the UK government. With only 500,000 having been opened since its inception in 2017, it really begs the question – why aren’t people taking this free money??
A 2021 Census survey showed there are over 12 million 25–39-year-olds in the UK and over 17 million under 25. That’s potentially 29 million people who could open and benefit from the LISA bonus! In the same year, Uswitch reported 852,000 first-time buyers in the UK which means nearly 59% of first-time buyers missed out on a bigger house deposit!
So, what’s the issue?
Some might say the snag is the 25% withdrawal penalty for withdrawing at any other time than when buying your first home, at age 60 or if you have a terminal illness. Some would see this as a positive to help them achieve their savings goals, but others may want the access in cases of emergency or changing needs and priorities.
In addition, first home purchases are also limited to £450,000 which could set you back if you are looking to buy in London or the South East.
The LISA forms part of your ISA allowance of £20,000 for tax year 2023/24 and although limited to £4000, can run alongside other types of ISA (Cash, Stocks & Shares, and Innovative Finance) allowing you to utilise your full ISA limit each tax year. The government bonus of 25% is paid monthly boosting your pot and accruing compound interest like any other savings.
Government top ups stop at age 50 as do tax-year contributions but the maximum government bonus can be as much as £33,000! If not used for a new home purchase, the account remains invested until age 60 when you can withdraw your savings completely free without penalty!
In conclusion, whilst there are some restrictions on the LISA, the benefits do out way massively with the 25% extra you don’t need to do anything for! So, if you’re looking to buy your first home or save towards your retirement and don’t mind the penalty or restrictions, then the Lifetime ISA could be an account to consider.
Sabrina Wright RBCB DipFA
Trainee Independent Financial Adviser