The Lifetime ISA (LISA) was added to the suite of ISA choices in April 2017 and is designed to encourage those under 40 to either save for their first home or to provide for their retirement.
They allow individuals to save a maximum of £4,000 each tax year within the LISA wrapper and any contributions made will count towards the individuals overall ISA allowance of £20,000. To encourage savers the government also adds a 25% bonus to contributions , which is applied at the end of the tax year, up to a maximum of £1,000.
So far so good then, but there must be a catch right?
Well, the downside is that if for any reason you would like to make a withdrawal or transfer to another type of ISA before the age of 60, there is a 25% penalty, unless you’re using the money to buy your first house.
This 25% penalty isn’t just the removal of the 25% added earlier, but rather a quarter of the value after the addition of the bonus , which means the penalty amounts to 6.25% of the contribution personally made.
Another potential downside to LISAs is the slow uptake of the market in terms of what is out there for consumers. Providers have been slow to bring out LISA products, perhaps deterred by the thought that LISAs will not be a long term part of the financial landscape. At the time of writing there is only one provider who offers a cash-only Lifetime ISA and seven providers who offer invested products.
The Lifetime ISA was introduced to save for a first home and/or retirement however there are other offerings on the market which offer similar features; Help-to-buy ISAs and Personal Pensions to name just two.
Each of these have their own attractions, and potential disadvantages. Pensions for example can have higher rate tax relief available on personal pension contributions but are, other than the 25% tax free cash, taxable as income on withdrawal. Help to Buy ISAs can be accessed without penalty should you need to, but they have lower allowed subscriptions and the bonus is only applied at the point at which the monies are used to buy a property.
As you can see, the decision, as with most things in life, is personal to the individual and depends on a number of factors. It is important though to ‘get it right’ whether for yourself or for the ‘next generation’ and as always here at Eldon, we’d be more than happy to have a chat if you want a hand to navigate the waters!