Lifetime Individual Savings Account (LISA) - What is a LISA?
A Lifetime Individual Savings Account (LISA) is a type of Individual Savings Account (ISA) that can be used to help save for a home, retirement or both. The Government provides a bonus of up to £1000 per year until you reach the age of 50.
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The originally mentioned rollout was in the chancellor's budget statement in April 2017. The announcement, however, fell rather flat, and since then the scheme seems to have passed by the majority of people.
The initiative was launched to try and combat the issue of those under 40 struggling to balance saving for retirement, whilst also attempting to save for a deposit for a property- which today is no easy feat.
In practice, the conditions of the Lifetime Individual Savings Account are pretty straightforward. When opening a LISA, you:
Must be aged between 18 and 40
Can put a maximum of £4,000 per year into it
If you've reached the maximum of £4,000 for the year the government will add a £1,000 bonus (25%), upon which interest can also be earned
If you save less than £4000, the government will match the amount with a proportional bonus
The bonus is paid each year up until you turn 50
How you want to use the Lifetime Individual Savings Account is entirely up to you. We’ll cover the two use cases in turn, exploring how each works.
If you're looking to buy a property in the future, then it's likely that the LISA itself will be cash-based, purely because the funds need to be liquid so you can move quickly and put down a deposit.
If you’re planning to use the savings for a deposit, then whatever you've saved once the account has been open for a period of 12 months or more can be used for that purpose. If your partner also has a LISA, you can still combine them, meaning that you get two sets of government bonuses.
There are some conditions to note:
The property you’re buying must be no higher in value than £450,000 and must have a mortgage
The LISA can’t be used to purchase a buy-to-let property (and therefore can’t be rented out)
If your partner also has a LISA and you’re receiving two sets of bonuses, the £450,000 property limit remains in place and doesn’t increase to a value of up to £900,000
Once you've used the savings to buy a property, you can keep the account open and continue contributing to it. When you do, government bonuses will still be paid until you’re 50, so you can use this amount for our next scenario:
Saving for retirement is a marathon, not a sprint- so we need to take a longer view on this one. Like mentioned before, it's possible for the LISA to be made up of cash or stocks (or a combination). Depending on how comfortable you are with risk will determine whether you fancy investing the money in stocks and shares, or whether you'd prefer to just take the cash.
If you're purely focused on using this account for retirement (or even if you do plan on using it for both a deposit and later on for retirement), it's always worthwhile to check out your options to see what would best suit you. Remember, for retirement you'll have this account into your 70's and beyond when it comes time to start withdrawing from it.
After your 60th birthday, you can withdraw all savings tax-free to be used for retirement.
The best case scenario would look something like this:
You open a LISA at the age of 18
You make the maximum contribution of £4,000 per year until you turn 50
These contributions (plus the 25% bonus), would mean end up with £160,000 (£32,000 of bonuses)
However, managing this would be quite a large task, so if we took a more reasonable £150 a month, then the scenario would look like this:
You contribute £150 a month (a total of £1,800 per year)
The government would then match this with 25%, meaning you'd end up with a total of £2,250 for the year
Assuming you contribute £150 every month, by the time you reach 50 you'd have a total value of £72,000
Now that we've spent plenty on extolling the virtues of a Lifetime Individual Savings Account, it's a good time to address some downsides. These downsides are inherent to Individual Savings Accounts in general, but of course, we’ll be specifically addressing the LISA.
We've touched on a few of them above (as part of the conditions relating to purchasing a property or using the funds for a deposit), but what we haven't covered are the penalties associated with withdrawing funds early:
If you do not wait until you’re 60 to withdraw for retirement uses, and you don’t put it towards a property, then there’s a charge of 25% of the total amount you withdraw (any government bonus, plus a penalty of 5%).
This withdrawal charge doesn’t apply if you cash out any funds during the first 12 months the account is open and no penalties are levied if you are terminally ill and need to cash out the funds.