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The pros and cons of a LISA

Esther Shaw / 12 April 2017 ( 09 March 2020 )

The Lifetime ISA, or LISA, is a vehicle which lets savers put money away either to buy a first home or for retirement.

British pound coins in a nest to represent saving in a LISA

But there are concerns that many people are still in the dark about the finer details, and that uptake has proven somewhat limited.

In fact, some considered its launch back in 2017 as a bit of a damp squib, with only a handful or providers offering products.

That said, the LISA – which allows savers aged 18 to 39 squirrel away up to £4,000 every year tax-free – comes with plenty of positive features, including a Government top-up of up to £1,000 a year until the saver turns 50.

And for parents and grandparents wishing to help their children and grandchildren get on the first rung of the property ladder, giving them money to put in a LISA is potentially an excellent idea.

Here we take a closer look at the pros and cons of a LISA:

Pros of a LISA

Savers have the option to choose between cash and stocks and shares.

Savers aged between 18 and 39 can slot money away into a LISA and choose between cash savings with a bank or building society, or stocks and shares with an investment company.

With cash savings they will earn interest; with stocks and shares, they will accumulate share growth.

For those planning to buy a home within five years it makes sense to open a cash LISA, as this option is risk-free. But those looking at a longer time-frame might want to consider an investment ISA, as this offers the opportunity for far bigger returns – though it also comes with the risk of losing money.

The LISA comes with a Government bonus

With a LISA, the saver receives a 25% bonus, paid in monthly, on everything put in until they turn 50. This means that by slotting away the full £4,000 a year, they will get £1,000 (this latter figure being the maximum bonus allowed per annum).

It’s important to note that the sums of money you put into a Lifetime ISA ties in with your annual ISA allowance (£20,000 for 2019/20). For example, if you pay £1,000 into your Lifetime ISA, you can still pay £19,000 into other ISA products.

And here’s another thing. Every tax year, you can open a Lifetime ISA, plus these other ISAs too: a cash ISA, a stocks and shares ISA and an innovative finance ISA.

No tax

As with other ISAs, savers won’t pay tax on savings, nor capital gains tax on investments held within a LISA.

A LISA and first-time buyers

For first-timer buyers saving for a home, the LISA is an improvement on the earlier Help to Buy ISA, the latter having been discontinued at the end of November 2019. Lifetime ISAs can be used to buy a home, but this is subject to a number of restrictions.

Lifetime ISAs are only available to first-time buyers who will actually live in the dwelling and who have never owned a home at all – anywhere - before. The maximum permissible price of the home purchase must also be no more than £450,000. Furthermore, only traditional repayment mortgages on the home are allowed.

A LISA is useful for the self-employed

For anyone working for themselves – and not receiving employer contributions towards a pension – a LISA offers a tax-efficient way to save for retirement.

Cons of a LISA

So far, only a few providers have launched products.

Banks have proven reticent about the LISA, saying they lacked sufficient guidance – and that the products were too complicated.

The funds for retirement aren’t accessible until 60

With a LISA, savers must wait until 60 to access the money in your LISA. So you might have to be patient and approach the LISA as a long-term commitment.

Early withdrawals will incur an exit penalty of 25%

If savers need to withdraw money before turning 60 – and aren’t using the cash to help fund the purchase of a first home – you will face a hefty 25% charge. This will take a chunk of any interest or investment growth - as well as some of the initial capital contributed.

LISAs are less rewarding than pensions

There were initial concerns that the launch of the LISA would lead to some people giving up on workplace pensions.

But in so doing people would miss out, as there is no tax relief on contributions made into a LISA and an employer is unable to contribute.

By opting for a LISA – rather than squeezing the maximum contributions possible out of an employer – the saver would in essence be forgoing free money.

With this in mind, it’s important to view LISAs as a supplement to pensions, but not as a replacement.

Fears the LISA may not be around forever

While the LISA was designed for a lifetime, some have questioned just how long LISAs would actually be around for – and whether they could end up going the same way as the likes of now-redundant Child Trust Funds (which were replaced by Junior ISAs).

Do your research into LISAs

The main benefits of the LISA are the free Government bonus, and the flexibility of being able to save for a first home and retirement at once.

But whether the LISA is right for you depends on whether the benefits are outweighed by the drawbacks.

The key with the LISA, as with any financial product, is to think carefully and take professional financial advice before making any decision.


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The opinions expressed are those of the author and are not held by Saga unless specifically stated. The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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