We all know an unsung hero, perhaps it is a family member who always puts everyone else first. Or your favourite band member who does the unseen work and gets on with it without fuss. In this blog we want to tell you a little about an unsung hero in the financial world: the Lifetime ISA, or as it is more often known, the LISA.
The LISA has two purposes: 1) To help save to buy your first house 2) To help save for retirement
Free money from the government you say?! As a member of the ISA family, LISAs are a way of sheltering your savings from tax. Where they are however different to a regular ISA, is the free money bit… You can get up to £1,000 free, each year, from the government. It is paid as a bonus, and the bonus amounts to 25% of whatever you save. If you put in the maximum of £4,000 in a year, this gets topped up to £5,000. If you were to fully utilise your LISA allowance and receive the bonus, you’d use up £5,000 of your annual ISA allowance (£20,000 each year at time of writing), meaning you’d still have £16,000 left to put into other ISAs.
Who can have one? Each person can have one, however they are only open to people aged 18 – 39 at the point of opening the account. You are also only able to contribute into them until age 50. They are a great way to save for younger people trying to get a foot on the property ladder. If a couple are buying together, both can open an account and each get bonuses. I personally put money into one when they launched in 2015 and have benefitted from 5 years’ worth of bonuses, which has helped me buy a property quicker. Should you have already bought your first house, you can save into one for retirement. The important difference with a LISA compared with a pension is that you cannot withdraw benefits until age 60 without paying penalties. Penalties are 25% of whatever you withdraw. Because of the maths you will likely lose more in penalties than you’ve received up to that point in bonuses and growth, so it is essential to avoid penalties if you can.
Investment options You can put the money into a Cash LISA, which will give you interest. At the time of writing, interest rates are at historic lows, so you’d really only be benefitting from the bonuses should you go for a cash LISA. That said interest rates may well increase in future. The alternative, which we’d generally advocate for most people with a longer-term horizon, would be an investment LISA. Just like a normal investment ISA or personal pension fund, you can invest into funds or shares, which try to grow the value of your capital over time at a higher level than you’re likely to get by putting it into the cash equivalent. Generally speaking, a cash LISA might be more beneficial for most people using it to buy their first home, as their time horizon is shorter and cannot afford for their savings to lose money. Those saving for retirement will typically have longer time horizons and can afford to take more risk to try and grow their savings, so could opt for an investment LISA, especially those who may be utilising the standard pension annual allowance every year. It is important to note that everyone’s circumstances are different and the information about investment options above is designed to provide information and guide, rather than be taken as advice.
Numbers to back it up Let’s look at an example. Sally, age 30, has just used a LISA to help buy her first house and knows that it can also be used to save towards retirement. Were Sally to put in the maximum allowed £4,000 each year until age 50, get her £1,000 bonuses and receive 5% investment growth each year, she’d have just over £173,596 after 20 years (age 50). Were she to leave that in place until age 60 and draw it from age 60, it’d be worth £282,770. She’d have put in £80,000, received £20,000 in government bonuses, received growth on both her savings and bonuses and ended up with over a quarter of a million pounds to use in retirement. These calculations do not constitute investment advice. We do not know your individual circumstances and these calculations are merely designed to illustrate the potential benefits of using a LISA, which can work very well for the right person in the right circumstances.
If you want help with savings advice for you, or someone close to you, do get in touch as we’d be very happy to have a chat.