The Lifetime ISA (LISA) offers anyone between the age of 18 – 39 the opportunity to open an account and contribute up to £4,000 per year. For every £4,000 the government will give you a bonus of £1,000 per year up to age 50. It is important to understand that being able to withdraw your capital from a LISA without penalty is limited to; using this for a deposit to buy your first home (12 months after opening the LISA), from age 60 for your retirement, or if you are terminally ill. From my perspective, the LISA can be a very useful saving tool to use along-side pensions and traditional ISA’s.
- Lifetime ISA’s allow you use your funds earlier than retirement.
A major downside to a younger person making pension contributions is that the money cannot be accessed until at least age 55. So, for an 18-year-old making a pension contribution, it is likely to be over 40 years (based on government consultation to increase the age of when pension benefits can be accessed) before the benefit will come to fruition. The LISA does not have the same restriction regarding age. If you are using the capital within the LISA to put towards a deposit on your first home, you can benefit from your savings and the government bonus in the short term. This will also encourage individuals to save, which can only be beneficial. Another important feature of the LISA is that if you are buying your first property with another first-time buyer you can put your money together for the deposit, which means it can make purchasing your first home far more affordable.
- The government bonus does not have to be paid back in income tax
The government bonus within a LISA is unique in the fact that it will not have to be paid back if the LISA is taken within the rules permitted. Therefore, if you were to contribute the maximum £4,000 every year into a LISA from the age of 18, by age 25 you will have contributed £28,000 and have £35,000 in the LISA with the tax relief. When the LISA is taken within the rules permitted, no tax will be paid on the amount withdrawn. If you chose to take the LISA at retirement instead, again, no income tax will be payable on the amount withdrawn.
- How does the LISA compare with pensions?
Pensions are extremely tax efficient, with tax relief on contributions at the individuals’ marginal rate of income tax. The pension will grow tax free and is held in trust and therefore outside of the estate for inheritance tax purposes. Although these features are useful at any age, the marginal rate tax relief will be more suited to higher rate taxpayers. A young saver is more likely to be a basic rate taxpayer and therefore less likely to benefit from the higher rate tax relief offered by a pension and in addition, monies within a LISA will also grow tax free. Receiving the 25% bonus from the government that can be used in the short term will encourage disciplined saving, with a view to attaining a goal of buying a property in the short term.
- You can access the LISA at any time, although at a penalty
Pensions cannot be accessed unless in serious ill health. LISA’s can be accessed if required, albeit incurring a 6% penalty. This should only be considered if your emergency fund has been exhausted.
The discipline of saving a percentage of your income to reach a goal or purpose is an important exercise which should begin early in life. Here at Wingate, we use sophisticated cashflow planning tools to demonstrate how the financial choices made now could affect your future objectives. Please get in touch with Wingate to see what your financial future could look like.
