What is a LISA?

Esther Shaw / 12 April 2017

The much-hyped Lifetime ISA, a new vehicle which lets savers put money away either to buy a first home or for retirement, launched on April 6, 2017.

But there are concerns that many people are still in the dark about the finer details, and that uptake could be limited.

In fact, some have dubbed the launch a damp squib, with only a handful or providers so far offering products.

That said, the LISA – which lets people between 18-40 years of age save 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.

Here we take a closer look at the pros and cons of the new Lifetime ISA.

For more information on ISAs as an alternative saving option, please click here.

Pros of the LIfetime ISA (LISA)

1) Savers have the option to choose between cash and stocks and shares

Savers aged between 18 and 40 can slot money away into a LISA and can 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 get 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. However, 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.

2) The LISA comes with a Government bonus of 25%

With a LISA, the saver gets a 25% bonus 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.

For those who start at 18 and put in the maximum amount until their 50th birthday, the LISA bonus can reach £32,000. This makes the LISA a very appealing option for first-time buyers.

3) No tax

As with other ISAs, savers won’t pay tax on savings, or capital gains tax on investments held within a LISA.

4) A LISA may be better than a Help to Buy ISA

For first-timer buyers saving for a home, the LISA is even better than the previously-launched Help to Buy ISA because you can save £4,000 a year – compared to £2,400 (£200 a month).

The LISA also beats the Help to Buy ISA when it comes to purchasing a property, as the saver can buy a home worth up to £450,000 with the LISA, compared to a maximum price of £250,000 outside London with the Help to Buy ISA, and £450,000 in the capital.

5) A LISA is useful for the self-employed

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

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Cons of the Lifetime ISA (LISA)

1) So far, only a few providers have launched products

Banks are very reticent about the LISA, saying they have not been given enough guidance – and that the products are too complicated.

As yet, no cash LISA providers and only a handful of investment LISA providers have gone live meaning options are limited.

2) The funds for retirement aren’t accessible until 60

With a LISA, savers have to wait until 60 to access the money in your LISA. With a pension, you can access your fund from 55.

3) 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 – they 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.

For example, if a saver put away £4,000 – and gets a £1,000 bonus from the Government – giving a total of £5,000, but wish to withdraw money early, they will then face the 25% charge, amounting to £1,250 of the pot. Depending on how much has been accrued in interest over the years, this could mean walking away with less than was originally put in.

4) LISAs are less rewarding than pensions

There are concerns that the launch of the LISA will lead to some people giving up on workplace pensions.

But if they do, they will 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 will 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.

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5) Fears the LISA may not be around forever

While the new LISA may be designed for a lifetime, some are questioning just how long LISAs will actually be around for – and whether they could end up going the same way as the now redundant Child Trust Funds.

Do your research

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 some of the many drawbacks.

The key with the LISA, as with any financial product, is to think carefully 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.