Lifetime ISAs
What’s a Lifetime ISA?
Lifetime ISAs were launched in 2016 to help younger people (for the avoidance of doubt – that’s the under 40s) save either for their first home, or for retirement. You can open a LISA as long as you are over 18 but under 40 and you can keep contributing until you are 50.
They may be badged as an ISA, but in reality, they’re a mish-mash of a personal pension, standard ISA and help-to-buy ISAs. You can invest up to £4,000 per year and the government adds in a 25% bonus to your savings, up to a maximum of £1,000 per year. You can use a Lifetime ISA (Individual Savings Account) to buy your first home up to £450,000, or for retirement at aged 60 or over. If you need the cash for any other reason, you can get it back, but you lose your government bonus and you’ll pay a 5% surcharge.
It has all the usual advantages of an ISA: income and capital gains from investments held within the ISA ‘wrapper’ are tax-free. It can sit alongside a normal ISA, but is deducted from your £20,000 limit (2021 to 2022 tax year).
Why do you need one?
LISAs have three main uses: the first is for those people who need to save for retirement, but don’t have an employer scheme or may want to get early access to the money early. It might suit the self-employed, for example.
A second group is those who are saving for their first home. A LISA can be a really handy way to build up a deposit, particularly if you start early enough. Unlike help to buy ISAs, the ability to invest in the stock market in a LISA can help your capital grow faster.
Another group that may be interested in an Isa are those who want to save more on top of their employer’s pension scheme or who have maxed out their pension contributions for the year. They could invest in a personal pension, but the LISA brings another option.
How do you do it?
It just so happens that Boring Money has done its homework on this. We’ve checked out the LISA on the major investment platforms and our findings are here: https://www.boringmoney.co.uk/lisas/lisas.
You will need to open a LISA account with one of the investment platforms and then you need to decide what to put in it. You can stick with cash, or pick a stock market investment such as a collective fund. The platform should have tools to help you pick the right option. This will depend on how long you have to invest, whether you can tolerate some variability in the value of your investment and your other savings.
Are there any pitfalls?
The main risks around LISAs are on the underlying investments. It is possible to pick the wrong one and to lose money. If you keep your LISA in cash, the biggest risks are around inflation – your savings can lose their purchasing power if prices rise considerably and you are earning less that 1% on your savings.
How much will it cost?
LISAs usually cost between £20 and £70 for a £10,000 investment. Then you may pay a little extra for the underlying investments – say, 0.5%-0.75% for a collective fund, or perhaps 0.25% for an exchange traded fund (ETF).
Useful links
