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Lifetime ISAs: What you need to know about LISA

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·5-min read
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LISA
An increasing number of peoole are making a house purchase withdrawal from their LISA. Photo: Getty Images

Over half a million Brits have opened a lifetime individual savings account (LISA), introduced in April 2017 to help young people save for retirement and buy their first home.

While LISA holders are currently too young to be making withdrawals for retirement, financial service company Hargreaves Lansdown (HL.L) said it has seen 5,258 clients making a house purchase withdrawal from their LISA.

The average age of its LISA holders is 31 years old, the same as the average age of a first-time buyer.

“It would seem that a fair number have opened a LISA for retirement. It’s particularly useful for self-employed people, who are not currently covered by auto-enrolment and so are less likely to have a pension – for this group the LISA can play a critical role in their retirement planning,” said Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown.

How does LISA work?

People between the age of 18 to 40 can contribute up to £4,000 ($5,421) to their LISA every tax year and in return they get a 25% bonus. They can withdraw money tax-free to buy their first home any time after the first year.

They can also contribute to their LISA until the age of 50 and withdraw money tax-free from it without paying a penalty from the age of 60. Contributions to the LISA form part of their annual £20,000 ISA allowance, so if they should keep track of how much they have put in other they could face a tax charge.

LISAs are tax efficient - savers won’t pay income tax on any savings that grow in excess of their personal allowance and if they have a stocks and shares LISA they don’t need to worry about paying dividend or capital gains tax.

What’s the catch?

The purpose of a LISA is to help people save for their first home or for retirement. If they take money out for any other reason they will incur a 25% penalty and could actually end up eating into their savings.

Last year the government temporarily reduced the LISA penalty to 20% in response to the pandemic. Despite this £34m was paid in penalties last tax year – more than three times the amount paid in the previous tax year.

HL’s client data shows 8221 clients have paid a penalty to withdraw.

The government has since reinstated the 25% penalty.

“We would ask the government to look at re-instating the 20% penalty it introduced between 6 March 2020 and 5 April 2021, so this doesn’t happen,” said Morrissey .

There is also a penalty for buying a home worth more than £450,000, which can be tough, especially for those in London.

Read more: ISAs remain super stars of UK's tax saving options

Who benefits from using a LISA?

Having a LISA and benefiting from the government top up can really boost home deposit saving and even if a person already contributes to a pension, a LISA can be a good alternative vehicle to supplement retirement planning.

Self-employed people may find them particularly beneficial because they don't benefit from auto-enrolment where they automatically contribute to a pension and receive a top up from their employer.

It can play a vital role for employed people too. The impact of the 25% bonus on a LISA is the same as basic rate tax relief on a pension, and all the income is tax free.

It means that anyone who is a basic rate taxpayer now, and expects to be so in retirement, who has already taken as much advantage of employer contributions as they can through their workplace pension, could use a LISA for the next chunk of their retirement savings – assuming they’re the right age to qualify.

While one can’t open a LISA after the age of 39 or contribute to it after the age of 50, the contributions they make will continue to benefit from investment growth.

it’s worth opening a LISA with a minimum amount so you can keep your options open in future, said Hargreaves Landdown, "even if you don’t see how it would work for your circumstances".

Read more: Money: 22 pension tips for 2022

How does it differ from a help-to-buy ISA?

Both LISAs and Help to Buy ISAs were designed to help people get on the property ladder. Help to Buy ISAs closed to new applicants in November 2019, but those already have one you can continue to save into it until 30 November 2029.

Both products attract a 25% government bonus, but while the maximum contribution to a LISA is £4,000, for a Help to Buy ISA (after the first year) it’s £2,400 – and it has to be paid into monthly.

And while the Help to Buy ISA is only for cash savings, Brits can choose between a cash LISA or a stocks and shares LISA.

Also, a Help to Buy covers first homes worth up to £450,000 in London but £250,000 elsewhere.

Some of the most popular funds bought for LISAs in 2021 Fundsmith Equity, JPMorgan (JPM) Emerging Markets and Marlborough UK Micro-Cap Growth.

The most popular shares bought for LISAs in 2021 include Apple (AAPL), Cineworld (CINE.L), Coinbase (COIN), Gamestop (GME), International Consolidated Airlines (IAG.L) and Tesla (TSLA)

Watch: How to live off a student loan

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