Launched five years ago the Lifetime ISA has been gradually gaining popularity with an estimated half a million people opening one.
But despite the generous bonus on offer it is still relatively unknown and often confused with the Help to Buy ISA.
‘Our research shows that nearly 60% of UK adults wouldn’t be able to explain an Isa let alone a Lisa. It is confusing,’ admits Kevin Mountfort, co-founder of savings platform Raisin UK.
As savings go the Lifetime ISA (Lisa) is by far the best deal available with a guaranteed 25% bonus each year.
But there are several strings attached to access the funds.
What is a Lifetime ISA?
A Lisa can only be used for two purposes: to buy a first home or as savings for retirement. You must be 18 or over but under 40 to open one. And you can only put money into the Lisa until the age of 50.
A Lisa can be cash or investment (known as stocks and shares) and you can put in up to £4,000 per year. The government then adds a 25% bonus each year up to a maximum of £1,000 per annum, which stops when you turn 50.
The £4,000 limit counts towards your annual ISA limit of £20,000 so it is possible to have £4,000 in a Lisa and up to £16,000 in a standard ISA.
To withdraw money from your ISA you must be buying your first home, aged 60 or over, or terminally ill with less than a year to live.
Lisa’s are best used to save for a first home deposit or part of retirement planning if you’re self employed.
‘The benefit is great but you need to pay attention to the small print’
Upon moving back to the UK in her late twenties, Louise Quick, decided it was time to ‘get a grip’ on her finances.
Aged 27, she was keen to get on the property ladder, so she asked her parent’s financial adviser about the best way to save for a deposit. He recommended a cash Lifetime ISA (Lisa) with Skipton Building Society.
‘In theory they are simple to understand and the benefit is great but you do need to pay attention to the small print.’
Now 31 she is about to withdraw £25,000 from the Lisa to buy a first home with her boyfriend.
She has deposited the maximum of £4,000 a year for the past five years, amassing a £5,000 bonus. Together with other savings this has enabled the couple to buy a three-bedroom property just outside London with a ten per cent deposit of £45,000.
‘One of the biggest issues with the Lisa is you are capped at £450,000. We had to look further outside London to find a property price under that and we could have stretched a bit higher.
‘We were looking for somewhere a bit bigger because of our age and we also both need offices as we work from home.
‘I think it is better suited for people who don’t live in cities or are younger and want somewhere smaller.’
As a freelance writer Louise is now considering keeping the Lisa to use as part of her future pension pot.
What are the benefits?
The 25% bonus is a huge incentive. If you open a cash Lisa at age 18 and put in the maximum amount until age 50 you will receive £32,000 in the bonus alone, on top of your £128,000 savings.
‘The bonus is unbeatable. If you are seriously committed to saving for a first home then it is a no-brainer,’ says savings expert Iona Bain, author of Own It.
For most people the fund will be used for a house deposit and money can be transferred from a Help to Buy ISA into a Lisa.
‘The general consensus is the Lisa is more beneficial than Help to Buy because you can put in lump sums not monthly contributions and Help to Buy is limited to £2,400 a year, and £250,000 property value outside London,’ explains Kevin.
If you are self-employed and therefore have no employer pension contributions then a Lisa can form part of a wider retirement plan.
‘You can only put in £4,000 a year, which is not enough for a pension but it is great to have alongside a private pension, although the tax relief is not quite as good,’ says Iona.
Are there any disadvantages?
If you wish to withdraw your money and don’t meet the first-time buyer, age 60 or terminally ill criteria, there is a penalty of 25%.
This is 25% of your total savings, meaning you will lose some of your own money as well as the government bonus.
‘Make sure you have easy-access savings elsewhere for an emergency because with the Lisa you get punished for accessing your own money,’ advises Iona.
‘I feel a little bit late to the party’
Opening a Lifetime ISA was part of Sophia Cheng’s concerted effort to think more positively about the future.
She admits to being ‘fairly nihilistic’ towards long-term goals in the past, particularly due to her concerns about climate change.
But Sophia’s desire to develop her climate education business With Many Roots has given her the motivation to try and save the ISA maximum allowance of £20,000 per year.
Last summer Sophia opened a stocks and shares ISA with ethical bank Triodos before opening a cash Lifetime ISA (Lisa) with Moneybox.
The 34-year-old from North Yorkshire says she hopes to use the Lisa towards a first property, which may be a self-build project.
‘I couldn’t find an ethical version of the Lisa so I went with Moneybox because I knew they were super- accessible on mobile and I didn’t want to go with a high street bank because I was trying to make an ethical choice.’
She says it was the 25% bonus that drew her to the Lisa because savings accounts offered such low interest rates.
‘I only found out about the Lisa by looking online at the gov.uk page. I didn’t hear about it from my peer group or family. I am not super financially literate, so I feel a bit late to the party.’
The Lisa can only be used to buy a first home if the property costs £450,000 or less, making purchases in London and the South East more difficult. You must be buying with a mortgage.
Currently the best cash Lisa interest rate is 0.85% with Moneybox. But if you’re looking to save for five years or more it is worth considering a stocks and shares Lisa, says Iona.
‘This should mitigate against any loss as long as you invest responsibly. By investing it you are taking the Government bonus and supercharging it,’ she adds.
‘Make sure you look at the fees and charges. For most people a managed fund is best because you don’t want to be worried about moving funds around,’ adds Kevin.
How do I get one?
There are relatively few Lisa products on the market but they can be found via building societies such as Skipton Building Society and reputable investment firms like AJ Bell and Hargreaves Lansdown.
Some of the savings apps like Moneybox, Plum and Nutmeg also offer Lisas but few of them offer both cash and stocks and shares options.
If you want more tips and tricks on saving money, as well as chat about cash and alerts on deals and discounts, join our Facebook Group, Money Pot.
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