The Lifetime ISA or LISA
The Lifetime ISA is designed to help you buy your first home, or for retirement
The LISA is a tax-free wrapper that lets you invest up to £4,000 in it every year. It can be as cash savings – so you get interest, or as stocks and shares – so you get potential capital growth, or loss.
At present there are very few savings institutions offering the LISA since it came to life on the 6th April 2017.
It’s designed for two specific purposes:
- The first is for first-time buyers to use towards a deposit for a residential property.
- The second is for retirement savings once you hit age 60; these funds do not count towards your pension Lifetime Allowance..
So if you do not use the LISA to buy your first home, you can keep it open and save for retirement.
You can save up to £4,000 a year in a LISA as a lump sum or by putting in cash when you can. The state will then add a 25% bonus on top. So if you save £1,000, you’ll have £1,250 and if you save the full £4,000, you’ll have £5,000. And that’s before any interest or potential capital growth.
- The bonus is paid every year until you hit age 50.
- The first year’s bonus is added to your account in April/May 2018, it’s then paid monthly.
- Once in your account it counts as money, so you’ll get interest on it too.
- You only get the bonus on contributions, not interest or stocks and shares growth/loss.
- The max bonus is £32,000 (unless rules change), if you open it at 18, and contribute the maximum until you hit age 50.
- You must be aged 18 or over but under 40 when you open a Lifetime ISA
Anyone aged 18 to 39 can open a LISA. For parents or grandparents wanting to help their children or grandchildren buy a home, giving them cash to put in a LISA is a great way to do it.
Those getting near to 40 need to be speedy – make sure you open one before you hit the cut-off age.
Once you’re over 40, you can continue to save into the LISA until your 50th birthday. And, if you want to transfer it to a new provider, for example to get a better interest rate, this is allowed – and then you can add to it. You can’t just open another for new money only.
You can take some or all of your cash out of a LISA before age 60 even if you’re not buying a property. In the first year that LISAs are available (so until 5 April 2018) there is no penalty for doing so; then again you won’t have got the bonus either as that’s only paid at the end of the first year.
After that a withdrawal penalty is charged, clawing back the 25% bonus – so it’s best to try to only use the LISA if you’re sure the cash is for one of the two defined purposes.
- Withdrawals for other reasons have a 25% penalty, equivalent to a loss of just over 6%. At first glance the fact you’ve had a 25% bonus added and then a 25% penalty would leave you back where you started. Yet unfortunately the maths doesn’t work like that…….
- … Imagine you saved £1,000 in April 2017. At the end of year one (so April 2018), you’ll get a £250 bonus, so you’ve £1,250 total (ignoring interest, for ease). If you withdrew it, and closed the account, the 25% penalty would be £312.50. So you’d get £937.50 back.
- You don’t pay the withdrawal charge if you die or are terminally ill. There is provision in the LISA rules so that if you have less than 12 months to live, you retain the bonus with no penalties. If you die, any LISA money including interest and bonuses is passed on to your beneficiaries without penalty, though it’ll no longer be in an ISA wrapper, and will form part of your estate for inheritance tax purposes.
- You can hold more than one LISA at any one time, provided that you only pay in to one at any time in each tax year (you can transfer the current year’s money around, provided it’s ALL transferred each time).
- You can open and contribute to a cash/investment ISA and a Lifetime ISA The overall ISA limit is £20,000 in the 2017/18 tax year. You are allowed to split this between a LISA (up to the maximum £4,000) and put the remaining £16,000 in a cash or investment ISA.
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.