Lifetime ISAs, or LISAs, are a popular savings product offered by banking firms. They’re often used by first-time buyers as a way to raise cash for a deposit. Here’s what you need to know about LISAs, their benefits, and their potential risks.
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What is a Lifetime ISA?
In a nutshell, Lifetime ISAs are a special savings account for people aged 18-39. ISA stands for “Individual Savings Account“. They are tax-free, and subsidised by the UK government. They’re most commonly used to help young people get on the property ladder. They’re also used by older people to create a nest egg for retirement.
Every tax year, a LISA permits to put away a certain amount of money. The government gives you £1 for every £4 you put away, for up to £1,000. You can pay into your LISA and claim this government bonus every year until you turn 50 years of age.
If you’re under the age of 60, you must use the money from your LISA to pay for your first home. This means that LISAs are not available to buyers of second or third homes.
You cannot withdraw money from a LISA until 12 months have elapsed. If you plan to buy a home in less than a year, a LISA is not for you. Additionally, if you plan to put the money towards a property, you should know that you’ll need to budget for a property worth less than £450,000.
The two types of Lifetime ISAs
Lifetime ISAs come in two types.
- Stocks and Shares LISAs are capital at risk. They allow you to put some money into your savings, which brokers then use for investments in stocks and shares. This allows you to accumulate money from dividends as well as government assistance. However, as with all investments, you can end up with less money than you put away, particularly if there is another recession, so you’ll need to be sure you know the risks. Stocks and Shares LISAs are intended for long-term saving, so that savers can ride out bumps in the market.
- Cash LISAs are less risky. They can’t decrease in value and providers sell them on a “short-term” basis. The downside of this decrease in risk is that the LISA is less lucrative. This is because they accumulate money at a fixed rate rather than in accordance with the performance of your investments. Therefore, while your money is more secure, and you’re almost guaranteed to get more out than you put in, you are also not going to make much in interest.
Most first-time buyers will look to Cash LISAs for their needs, since the risk is much lower. Stocks and Shares LISAs are really meant for people saving for retirement. You may find that your specific circumstances make a Stocks and Shares LISA more useful, but it’s definitely a good idea to speak to a professional advisor before you invest.
What happens if I withdraw the money early?
If you are under 60 and not withdrawing the money from your Lifetime ISA to buy your first home, you will take a 25% penalty. Because the government offers £1 for every £4 you save, you’ll not only lose all the government bonus, but also 6.25% of your own money. This disincentivises early withdrawal.
The only case in which you can withdraw the money early is if you are diagnosed with a terminal illness. In that case, your provider will allow you to disburse the money, including the bonus, on compassionate grounds.
Is a Lifetime ISA right for me?
LISAs are best suited to people who want to get the most out of their savings, over a period of 12 months to many years. If you’re looking to buy a home in the next six months, a LISA is probably not right for you.
Make sure you do plenty of research before you apply for a LISA, as it is very hard to get money of a LISA once it’s in, and you will lose a lot of money if you withdraw from the LISA early. Above all, don’t put all your eggs in one basket, and make sure you’re saving elsewhere, as well as in your ISA.
Above all, remember that LISAs are not the only savings products available out there, so be sure to research alternatives before you settle on applying for a LISA.
I already have an ISA – can I transfer the money into a Lifetime ISA?
You usually can, subject to the terms of your regular ISA. However, it’s a good idea to remember that you can only get the 25% bonus on up to £4,000 you pay in. Therefore, if you transfer the whole ISA you will only see a benefit on the first £4,000.
Also remember that there is an overall ISA limit of £20,000 per year. This means that if you do put away £4,000 into a LISA, you can’t put more than £16,000 into your regular ISA.
What else do I need to be wary about?
If you’re a first-time buyer, your LISA provider will need to communicate with your conveyancer during the homebuying process. Therefore, it’s a good idea to look at Trustpilot or other review sites to see what the provider’s customer service is like before you apply.
What’s more, make sure the provider has a usable and intuitive interface, so that ease of use is paramount. We’re talking about a lot of money here, and once you pay it in, you can’t get it out! It’s good to go with a provider with good, easy-to-understand design.
Finally, depending on the LISA you go for, charges can vary. Make sure to compare, and as always, seek professional advice if you’re really not sure.
Good luck, and happy saving!