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The Lifetime ISA - what is it and what is it good for?
Lifetime ISA - what is it?
A new breed of ISA, namely the Lifetime ISA (or LISA), was introduced in April 2017 for savers under 40. The purpose? To help first-time property buyers save more quickly for a deposit, or, act as an extra means of building up tax-efficient savings for retirement (after age 60).
With Help-to-Buy ISAs now phased out for new applications (as from November 2019), the Lifetime ISA represents the primary government savings initiative for first-time buyers. The LISA, which can be held as a Cash ISA or Stocks & Shares ISA, permits a maximum contribution of £4,000 each year and attracts a generous tax-free government bonus of 25%, or a maximum of £1,000 each year.
This is applied directly to the LISA for each deposit made, in contrast to the Help-to-Buy ISA, where the bonus is only applied at the point of purchase. A LISA can be opened from age 18 and contributions can be made until age 50, meaning that a total maximum tax-free bonus of £33,000 is potentially available to savers over the years.
"A total maximum tax-free bonus of £33,000 is potentially available to savers over the years"
The LISA can sit alongside any other ISA wrapper you might hold, and the £4,000 annual allowance forms part of the overall ISA allowance of £20,000. If you would like to take advantage of this allowance for 2020/21 tax year, it must be processed before 6th April 2021.
How can I access my LISA funds?
To retain the tax-free bonuses applied, the LISA must be used only for a first property deposit (for property value up to £450,000) or drawn after age 60. If funds are withdrawn for any other reason, the withdrawal is subject to an early withdrawal charge. Usually, this means that the bonus is taken away, plus there is an additional 5% charge on top (total withdrawal charge of 25%).
From 6 March 2020 to 5 April 2021 only, there has been a temporary suspension to this additional charge due to the Covid-19 pandemic; the withdrawal charge has been reduced to 20% and savers are therefore only required to pay back the government bonus that has been applied, with no additional penalty.
The reason for this move has been the Treasury’s recognition of the unprecedented financial hardship brought on by the pandemic. The penalty suspension is intended to provide some additional flexibility for LISA holders to access their funds if needed in these uncertain times, particularly younger savers whose income may have been affected this year.
In 2021/22 tax year, this penalty will be reinstated and an early LISA withdrawal charge of 25% will apply, therefore if you wish to access your LISA funds penalty-free, other than to purchase a first home (no LISA holders will have reached age 60 yet), you will need to do this before 6th April 2021. However, where possible, it is better to leave the monies invested within the LISA to receive the generous bonus.
Cash or Stocks & Shares LISA?
Investing into equities, or stocks and shares, should only be considered if you have the capacity to withstand fluctuations in value and you have a medium to long-term investment approach, i.e., 5 years or more.
Where you are building your first property deposit and your anticipated purchase date is sooner than this, a Cash LISA would be more appropriate as this will safeguard the value of your savings ahead of the upcoming purchase. On the other hand, if you intend to build up additional tax-free savings for the long-term, either for retirement or a future property purchase further down the line, a Stocks and Shares LISA will provide the opportunity for greater long-term returns.
Before investing into Stocks & Shares, it is important that you understand the risks associated with equity-based investment and your tolerance of these risks, and of course that you are aware that past performance is no guarantee of future returns.
Please note: The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
Are LISAs a good option for retirement planning?
With tax-efficient personal pension contributions capped at the level of your earning (or £3,600 if more) and by the annual allowance (£40,000 for most people but any employer contributions use part of this), a LISA investment can be another route to maximise tax-efficient funds for retirement. As with an ordinary ISA or pensions, the LISA funds grow income and capital gains tax free, however, in contrast to pension funds, the LISA can be drawn income tax-free later down the line.
"Bolstering your retirement savings and generating a tax free income source to sit alongside your pensions"
The LISA can therefore provide an effective means of obtaining additional tax-relief (in the form of a maximum bonus of £1,000 per annum), bolstering your retirement savings and generating a tax-free income source to sit alongside your pensions later down the line. It is important to remember, however, that the earliest point the LISA funds could be accessed for your retirement would be age 60, which is slightly later than the current minimum pension age of 55, increasing to 57 in 2028.
If you would like to talk to an adviser about LISA funding or general retirement and pension planning, get in touch and arrange a free consultation with us.