There’s been a great deal of talk recently about the launch on April 6th this year of the Lifetime ISA (LISA). So, I thought it would be very worth while to provide you with a quick overview of what exactly a LISA is, how they best work and who they work best for.
With property prices increasing and the accompanying problems of getting that all important deposit together for your first home, LISAs are designed to be a vehicle to help overcome this challenge.
Specifically aimed at investors between the ages of 18 and 40, who are saving towards the purchase of their first home. The idea being that savers can put in up to £4,000 a year and receive a bonus of up to £1,000 per year from the Government. So, if you have your LISA between the ages of 18 and 50 that could be as large as £32,000 in bonus payments (based on current bonus payments). Although Mr Osborne stated that the annual bonus would continue to be paid to LISA holders until they reach their 50th birthday, former pensions minister Steve Webb added that the 25% rate could turn out to be a “Teaser LISA” rate that may fall back in the future.
There are also some stipulations that will accompany your LISA. The funds must be used to purchase your first home (wroth up to £450,000). If you don’t use your LISA for the purchase of your
first home, then the funds will be locked away until you are 60 years old.
Just like a standard ISA, you have the choice of holding your investment in cash, or invest it in funds and individual stocks where any growth in your assets will be tax-free. You can use your LISA for the purchase of your first house, or access the funds at 60. However, if you take out any cash before then there is a rather large 5% penalty to pay, as well as losing your government bonus, along with any investment gains you’re made on that bonus!
There has been a great deal of debate as to whether the LISA would make a viable pension vehicle for workers in their 20’s and 30’s, but the fact that a LISA does not attract employer contributions may outweigh its attractive 25% annual bonus.
I suspect the real dilemma, for investors saving for a home, is the choice between the LISA and the Help-to-Buy Isa. Although the latter Help-to-Buy Isa will close to new savers in November 2019 and will only be open to new contributions until 2029. But if you are one of those investors whose timings place you in a position of choice, then there are some important points you should be aware of.
Firstly, the amount you are allowed to invest annually differs. Both products offer a 25% government bonus for those buying a home, but the allowable investment needs considering. A LISA allows you to invest £4,000 annually and will attract a £1,000 top up. A Help-to-Buy Isa allows you to invest £2,400 annually and attracts a bonus of £600. Plus, when you first open a Help-to-Buy Isa, if you can deposit a lump sum of £1,000 that will generate a bonus of £250 (meaning the bonus in the first year could be £850). So, a Help-to-Buy has a bonus cap of £3,000 whereas a LISA pays a bonus of £1,000 every year, so could climb to £32,000.
There are some differences in the value of the property you can buy too. Help-to-Buy allows you to purchase a property up to £250,000 outside London and £450,000 within London. The LISA puts a straight cap of £450,000 wherever you decide to buy in the UK.
So as with all financial products, careful choices have to be made. As the LISA may be ideal for some of us, but that largely depends upon the life stage we are at and what we are planning for in the future.