A Lifetime ISA is a handy way of building a first-time home deposit but they do come with some drawback too . The biggest benefit is also the drawback. You receive government bonus for saving into a LISA but will lose this if you withdraw from it early. And the way the calculations work you potentially stand to lose more than you contributed.
So lets’ take a quick look at what is a Lifetime ISA and six benefits, drawbacks and things to consider with a LISA.
What is a Lifetime ISA (LISA)
It’s an Individual Savings Account that can be opened between the ages of 18-40 with the express purpose of using as a deposit for a first home or rolling it over into retirement if not used as a house deposit.
You can save £4,000 a year max into one which uses £4,000 of your usual £20,000 ISA allowance and contribute in until you are 50.
Benefits of a Lifetime ISA
- For every £ you save you’ll receive 25% government bonus up to the maximum of annual allowance of £4,000 (so £5,000 in your LISA per year)
- Family members such as parents and grandparents can contribute to it for you too
- Can be kept in Cash if saving for the short term, or invested if saving for medium to long term
- Can be used toward retirement savings if not used for first time house deposit
- You can still have a regular ISA as well as long as you don’t go over the total annual allowance of £4,000 for the LISA and £20,000 in total ISAs.
- If you are buying a house with someone, you can both use a LISA toward the deposit.
Drawbacks of a Lifetime ISA
- If you need to withdraw early from this rather than use it for a house deposit or retirement you will pay a withdrawal charge of 25%.
- The maximum house value a Lifetime ISA can be used as a deposit for is £450,000. This may sound a lot but can mean fist time buyers in London and the South cant benefit
- The maximum annual contribution is £4,000 (plus government bonus) so it can take a number of years to build up the sufficient 5-10% deposit for a home
- Its only for first time buyers so if you’ve previously had a house and are now renting again, you wont be eligible to use it toward a house deposit.
- It is designed to be used with a Mortgage ( as a deposit that is withdrawn by your solicitor) so not suitable for cash purchases
- If using for retirement you can only contribute until your 50th birthday and access from your 60th birthday.
Things to Consider
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The biggest drawback with the Lifetime ISA is the withdrawal charge.
HMRC reclaimed £34m in LISA withdrawal charges in the 2020/21 tax year, despite having temporarily reduced the penalty to 20%. That was a three times increase on the previous tax year.
Before you contribute into the LISA ask yourself:
- Are you 100% sure you wont need this money again
If you think you “might” need to access it again, consider saving into your regular ISA instead as this is accessible without penalty. Then review that question before the end of each tax year to assess how much you can confidently put into your LISA that you wont need to withdraw.
Given the drawbacks be sure you:
- Plan to buy with a Mortgage and use the LISA as all or part of the deposit
- Plan to buy a house valued under £450,000 (or sign the petition here to get this limit reviewed)
LISA for Retirement
If you have no plans to buy and instead want to keep the LISA toward retirement savings consider the following
Might a workplace pension with 3% employer contributions and tax relief be more suitable? Especially if you are a higher or additional rate tax payer as you can receive the first 20% tax relief on every personal pension contribution and potentially claim the additional 20/25% tax relief back. This combined is greater than the LISA government bonus.
You can also access your pension earlier (currently 55 but rising to 10 years in front of State Pension Age and you and your employer can continue to contribute up until 75.
LISA in Summary
A Lifetime ISA can be an additional help for first time buyers needing to build their deposit but carefully consider how confident you are that you can put that money away without needing it again and consider if a more flexible approach of combining LISA, ISA and Pension may be a good option for you.
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