The Lifetime ISA or LISA is a new savings product designed to encourage young people to save money long-term. From April, eligible savers can benefit from government bonuses by putting money into a LISA. While the LISA is quite flexible in terms of how you could input money, it has two main options when it comes to using the funds. It can either be used to help first-time buyers get on the property ladder or as a more traditional savings device to supplement retirement income.
How the LISA works
Any person between the ages of 18 and 40 can start a LISA from April 2017 and start saving. There is a maximum threshold of £4,000 of contributions per tax year and for every £1 the saver puts in, the government will add 25p. This means that the saver could get £1,000 per year from the government for the duration of the LISA. While you need to be under 40 to start an ISA you can continue to pay in until you reach 50 so there is a potential £32,000 up for grabs. If for some reason the saver needs to extract the funds before they reach 60 without using the funds for a house they can do so but they will lose the government bonus and 6.25% of the money they put in. For example, if they contributed £4,000 in year 1 the government would add an extra £1,000 giving them total savings of £5,000 but if they were to empty the account for any reason other than buying a home they would only get £3,750 back.
Using a LISA to buy a property
You may be familiar with the ‘Help to Buy ISA’ that has been very popular over the past few years with those looking to get on the property ladder and the LISA is almost like a Help to Buy ISA version 2 so many of the rules are the same:
- The saver must hold their LISA for at least 12 months before they use it;
- The property must be residential, in the UK and not exceed a value of £450,000;
- All buyers with a LISA must be first-time buyers intending to live in the property as their sole residence;
- First-time buyers buying a house together can both take advantage of the LISA and combine their funds for the purchase;
- Those with an existing Help to Buy ISA can transfer their funds into a LISA and still get the bonus on those funds providing they make the transfer before April 2018.
Using a LISA for general savings
If the saver is already a home owner or has no intention of buying a property they can still take advantage of the scheme and use it to save for retirement. When the saver retires (and is at least 60) they can extract the funds tax free for any purpose. This route can be more efficient than traditional pensions in some cases but there are too many variables to make a relevant comparison between the two here. If you would like any more information on the LISA, please feel free to contact us.