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The lifetime ISA (LISA) is a highly popular investment “vehicle”. Since its introduction in 2017, around 775,000 people have opened one. Yet how does it work and is it worth it?
In this guide, our Burnley financial planners offer a short guide to the lifetime ISA – offering ideas about how it can be integrated into a wider financial plan. We hope these insights are helpful to you. Please get in touch for more information or to discuss your own financial plan with us.
What is the lifetime ISA?
The lifetime ISA – or LISA – is a type of individual savings account (ISA) which is designed to encourage people to save for their first home or for retirement.
It does this by offering a range of attractive tax benefits and government financial support. Not only can an ISA allow you to generate tax-free dividends, interest and capital gains within your account. Your contributions can also receive a generous “top-up” from the state.
In 2023-24, an individual can put up to £4,000 into their lifetime ISA and receive a 25% government “bonus” – up to £1,000 per tax year. Provided the funds are used in line with LISA rules, this extra money can give savers and investors a significant “leg up”.
There is a £20,000 annual limit on how much you can put into all of your ISAs. So, if you put £20,000 into your stocks and shares ISAs in 2023-24, you cannot put anything into your LISA.
However, another person could put £4,000 into their LISA and still have a £16,000 ISA allowance to commit elsewhere – e.g. their cash ISA, innovative finance ISA etc.
What are the lifetime ISA rules?
Not everyone can open a lifetime ISA. Firstly, you need to be aged between 18 and 39. Moreover, you need to be a UK resident. If you move abroad after opening a LISA, you will need to tell your provider.
You can access the money immediately if the funds are put towards the purchase of your first home. The funds become available for any purpose after you turn 60. You can also withdraw from your account if you are diagnosed as terminally ill with under 12 months left to live.
After you turn age 50, you cannot contribute to your LISA anymore – nor can you receive the 25% government bonus. However, the account stays open and can continue to generate interest, capital gains or dividends.
How should I use a lifetime ISA?
A lifetime ISA is a natural first choice for consideration if you are yet to buy your first property (assuming you want to be a homeowner).
The 25% “boost” from the government is a huge benefit and can add up to some significant sums over the years for a first-time buyer. For instance, suppose you maximise your LISA contributions over 5 tax years. By year 5, you will receive an extra £5,000.
Moreover, LISAs operate on the “one ISA, one person” rule. This means that, if you have a partner, he/she can also have their own LISA and benefit from the government boost. In the example above, therefore, over 5 years a couple could get an extra £10,000 from the government to put towards their first home.
The drawback, of course, is that the money is locked away until your first property purchase. Therefore, you need to be confident that you will not need the funds in the meantime. To mitigate this risk, consider having 3-6 months’ worth of living costs saved in another account (easy access) which you can use in emergencies.
For those considering a lifetime ISA for retirement, there is more of a debate about its utility versus a pension. One advantage of the former is that the 25% bonus compares favourably against the tax relief offered to a basic rate taxpayer (20%) on pension contributions.
For a higher rate taxpayer, however, a pension is arguably more attractive due to the 40% tax relief. There is also no cut-off age for contributing to a pension. For the LISA, the limit is age 50.
Most people can put more into a pension compared to a LISA. In 2023-24, the maximum pension annual allowance is £60,000. For a LISA, the annual limit is £4,000.
There is also the debate regarding inheritance tax (IHT). In 2023-24, pension pots can be passed down to beneficiaries without an IHT liability. However, savings in a lifetime ISA will fall into the deceased’s “estate” and may be liable (unless shares are held in certain assets which qualify for Business Relief – e.g. AIM shares).
On withdrawals, pensions cannot be accessed until age 55 (or, from age 57 in 2028). A lifetime ISA cannot be accessed for retirement before age 60 – unless you are terminally ill. However, after this, you can take as much as you like. For pensions, up to 25% can be withdrawn tax-free and anything after that may be subject to income tax.
In short, the suitability of a lifetime ISA for retirement depends on your unique financial circumstances and goals. However, on balance, pensions arguably come out on top.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you.
Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
E: info@elmfieldfp.co.uk
