Government help when you save for a property or pension with a Lisa
1. The Lifetime Isa (Lisa) is a savings account which gets topped up by the government. But if you’re a lady (or gent) of a certain age, look away now: the Lisa is limited to those between 18 and 39.
2. The Lisa lets you save up to £4,000 a year into cash or investments without paying tax on any interest, income or capital gains. The government then gives you a bonus of 25% of what you’ve saved (up to £1,000 a year).
3. Sounds good, eh? The bonus is paid until age 50 so you could potentially get £32,000 ‘free money’ if you paid in the maximum £128,000 allowed over 32 years.
4. But hold that holiday or supercar! Boringly, the money can only be used to buy your first property or as a pension from the age of 60. Well, there had to be a hitch, didn’t there?
5. There are some other catches. You must be a first-time buyer purchasing a property worth £450,000 or less. The £4,000 allowance comes out of your overall Isa allowance which in the tax year 2018-2019 is £20,000.
6. There is a massive 25% penalty if you take the money before age 60 or don’t use it to buy a house (except in case of death or terminal illness). That slice includes any interest or gains, not just the original money you put in.
7. Don’t use a Lisa instead of a workplace pension. The bonus is potentially a lot less than an employer contribution and/or the tax which higher-rate payers can reclaim. But if you’ve hit your lifetime allowance of £1 million on pension savings, a Lisa could be a good retirement top-up.
8. Beware a technical hitch. Money saved with the Lisa can’t be used for the exchange deposit (normally 10% of the house price you give to the seller on exchange of contracts). It can only be used for the mortgage deposit ie your contribution to the total cost of the house when the sale completes.
9. Also, few firms offer it so investment fees can be steep. So far only one cash Lisa is available (this is from Skipton Building Society and is free) while stocks and shares Lisas are available from AJ Bell, Hargreaves Lansdown, Moneybox, Nutmeg, One Family and The Share Centre. Fees from these firms vary around 1% of the value of your saving.
10. The alternative for homebuyers is a Help to Buy Isa (available to start until 2021). You get less bonus and can only invest in cash but the terms are more flexible. You can transfer an H2B into a Lisa and you can hold both but only the bonus from one can be used to buy a property.
- Chapter and verse from the government on the subject here.
- Using a Lisa for retirement is explained in depth here.
- Help to buy Isas explained and compared here versus the Lisa.
Last updated 8 May 2018.