The Wire: Spring 2022 – Aged 18 to 39? Here are 3 valuable benefits of a Lifetime ISA

(Estimated read time 5 minutes)

Aged 18 to 39? Here are 3 valuable benefits of a Lifetime ISA

Since the Lifetime ISA (LISA) was launched in April 2017, more than 1 million Brits aged 18 to 39 have opened one. In fact, the number of LISAs opened jumped by 45% in the 12 months to April 2020, signifying a major increase in popularity for these often-overlooked savings accounts.

Despite becoming better-known in recent years, LISAs still make up a small proportion of the number of ISAs held in the UK. According to the Times, 13 million people opened an ISA in the year to April 2020, with only half a million of those being LISAs.

There are numerous benefits to using a LISA to save for your first home or retirement, many of which are underexplored by those saving for these huge milestones.

If you are looking at the big picture and want to grow your wealth in an efficient way, a LISA could be the perfect option for you.

Here are three valuable benefits of a Lifetime ISA.

1. The government adds a 25% bonus to every LISA contribution

One of the most attractive features of a LISA is the government bonus. When you save into your LISA, the government increases the sum by 25%.

The annual LISA contribution limit is £4,000, so if you contributed the full amount, it would automatically be topped up to £5,000.

LISAs are individual accounts but, if you are saving for your first home as a couple, you can combine your individual LISAs when you buy your home together. If you have contributed a total of £8,000 as a couple, for example, the government bonus will boost this to £10,000, meaning your savings go a lot further.

If you are using your LISA to save for retirement, your contributions over the years will also be supplemented by this government top-up, providing you with a solid foundation when you withdraw your LISA funds at age 60 or above.

Remember, if you hold any other ISAs, your LISA contributions form part of the overall £20,000 limit across your accounts. For example, if you have a Cash or Stocks and Shares ISA and contribute £4,000 to your LISA, you can only contribute a further £16,000 to your other ISAs in the 2021/22 or 2022/23 tax years.

Even with these limitations, the government top-up provides a significant boost to your hard-earned savings, providing you with the opportunity to grow your wealth as you save towards your future goals.

2. LISAs are dual-purpose

The LISA is designed with two distinct purposes: buying your first home and saving for retirement.

Buying your first home

As you read earlier, using your LISA to help buy your first home means that you get a bonus of 25%, perhaps helping you to save the deposit you need for your dream home.

When the time comes to use your LISA funds to place a deposit on your first home, you can draw this money without paying a charge, so long as the money is used for this purpose only.

If you decide to draw your LISA funds for any other reason except retirement, you can – but you will pay a 25% fee when you do so.

There are a few restrictions to consider when using your LISA to purchase your first home, including:

  • The home you buy must be purchased for less than £450,000.
  • You must buy the property at least 12 months after making your first LISA contribution.
  • If you have a Help-to-Buy ISA as well as a LISA, you can only use the government bonus from one of these accounts to pay for your first home.

Saving for retirement

While, unlike your pension, you don’t get tax relief on LISA contributions, you do benefit from the 25% government top-up when saving for retirement. You also won’t pay any Income Tax or Capital Gains Tax (CGT) on the returns your ISA generates.

Using your LISA as a means of supplementing your pension contributions from an early age can help you build up a substantial retirement fund, which could allow you to retire with a greater quality of life.

If you are under 40 and aren’t saving for your first home, it could be beneficial to open a LISA and lock in your 25% top-up for retirement. Once the LISA is open, you can keep contributing until you’re 50, so it may make sense to open one as soon as possible.

Plus, if you are concerned about breaching the Lifetime Allowance (LTA), which will remain at £1,073,100 until 2026, you could use your LISA as an alternative way of saving for your retirement.

Similarly, if you maximise your pension contributions up to the Annual Allowance in any given tax year, you could place an additional £4,000 in your LISA for retirement if you wish.

3. LISAs are tax-efficient

Lastly, a key benefit of saving into a LISA is that these accounts are highly tax-efficient.

When it comes to understanding LISA tax regulations, the same rules apply as to other ISAs: any profits you gain from your LISA, including the government top-up, are neither subject to Income Tax nor CGT.

Simply put, your LISA is a tax-wrapper that can help your wealth to grow steadily over the years without increasing your tax bill.

If you are keen to explore LISA options, you can open either a Cash or a Stocks and Shares LISA.

Here are some key features of a Cash LISA:

  • Like most cash savings accounts, your Cash LISA may earn interest, but its value cannot decrease.
  • Your money is not invested on your behalf by your LISA provider.
  • A Cash LISA is lower risk than a Stocks and Shares LISA, because it is not subject to shifts in investment value.

Alternatively, if you’re thinking of saving for five years or more, you could take out a Stocks and Shares LISA, which functions slightly differently to a Cash LISA:

  • Your contributions are invested on your behalf in stocks and shares, and so the value of your LISA may increase or decrease depending on the underlying performance of the investments.
  • Stocks and Shares LISAs are higher risk than a Cash ISA, because the value of your savings is affected by the investments made on your behalf.

Get in touch

We can help you meet your retirement or house-buying goals and assist in creating a long-term investment strategy to increase your financial stability.

If you want to learn more about LISA options and need guidance, contact us today to discuss your options with a financial planner. Please email or contact us on 020 7400 4700.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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