…a 25% government bonus towards your first home or retirement.
The LISA (Lifetime ISA) was introduced in April of this year. It offers a flexible way for adults between the ages of 18 and 40 to save for their first home or for retirement.
You can save up to a maximum of £4,000 per tax year by way of a lump sum or regular investment. You can choose to save as cash or invest in stocks and shares. The government will then add a 25% bonus to top the savings up. This means if you put the maximum £4,000 in your LISA the government will add £1,000, leaving you with £5,000 before interest or growth.
For first time buyers this is a similar offering to the Help to Buy ISA. However compared to the Help to Buy ISA savers can save an additional £600 into the LISA per year and receive an additional £150 bonus. You cannot get the bonus from both schemes but you may transfer your Help to Buy ISA into your LISA.
You must be aged 18 or over but under 40 when you open a LISA. You will then be able to pay into it until you are 50 and will qualify for a 25% bonus on any payments of up to £4,000 per year. This makes it possible to access up to £32,000 bonus over the lifetime of the LISA.
If you withdraw the money before age 60 and it’s not to purchase your first home, you’ll pay a withdrawal charge (except if you’re diagnosed with a terminal illness). This could mean you get back less than you put in.
The LISA can be used in addition to, or instead of, a pension. However unless you’re a self-employed basic rate tax payer using a pension to save for retirement is still likely to be a better choice than a LISA.
For example if you are a basic rate tax payer, to save £100 into a pension will cost you £80 as your contribution is deemed to be net of 20% (which the government will top your pension up by). With the LISA you are saving your taxed income. Therefore if you put the same amount of £80 into a LISA the government will add a £25% bonus meaning you will again end up with £100.
Any benefit to basic tax payers will only arise once you start to withdraw the money at retirement. The money held within the ISA and income generated from it can be withdrawn entirely tax free once you reach the age of 60. In comparison, the income streams your pension produces are subject to income tax. Unlike pensions however, the LISA will be subject to Inheritance Tax, it may affect the pre-pension age benefits entitlement and it can be used to pay creditors in bankruptcy.
There is no definitive yes or no answer to the question “Should I use a LISA to save for retirement?” but it is our opinion that these will become valuable products for basic rate tax payers who own few assets that are subject to Inheritance Tax and who are not in receipt of any state benefits.
Since the launch of the LISA on 6 April 2017 there has been criticism of the lack of available products on the market. However Greaves West & Ayre is happy to assist you in setting up your LISA with a suitable provider. For more information about LISA’s or any other investment issues speak to the partner in charge of your affairs or contact our Wealth Management team.
Richard J Ayre
This article is based on current UK tax legislation. The reader should understand that tax legislation can change from time to time and also that if you invest in stocks and shares your investment can go down as well as up. This article does not constitute financial advice and before acting upon it, the reader should take the appropriate financial advice.