Available to those between 18 and 39, you can save up to £4,000 per year in cash – or invest it over the longer term into the stock market if you prefer – and receive a 25% bonus every year from the Government.
Contributions and bonus payments can continue until you reach 50 years of age, and all the money will grow tax-free.
But while the idea of free cash to top up your savings may sound very attractive, it does come with quite a few strings attached.
Here are some important things you might wish to consider in deciding if a 'LISA' is right for you.
LIFETIME ISA PROS
Savings are topped up
One of the best things about the LISA is the fact it combines the benefits of an ISA with some of the attractive features of a pension (in the form of a 25% Government bonus).
This means that if, for example, you slot away the maximum of £4,000, the top-up will bring your balance up to £5,000 in year one – and that’s before you add in interest or investment growth.
The maximum bonus from the Government is £32,000; this is what you could get if you open a LISA at 18 and put in £4,000 every year until 50.
You can choose between cash and stocks-and-shares
As a saver, you can choose between a cash LISA and an investment LISA.
With access to the stock market via an investment LISA, you have the potential to get much greater long-term returns (although you have to remember that investing comes with risks attached). And the level of FSCS protection for investments is £50,000 compared to the higher limit of £85,000 for cash savings.
You don’t have to pay tax
As a LISA forms part of your £20,000 a year ISA allowance, you won’t pay tax on your savings or capital gains tax on your investments.
A helpful retirement option for the self-employed
A LISA will have particular appeal to those who do not have pension provision through an employer, such as the self-employed.
Better than the Help to Buy ISA for those looking to get onto the property ladder
If you are saving towards your dream home, the LISA is a good option as you can get access to some – or all – of the money when you need it.
For a first time buyer, the LISA is even better than the previously-launched Help to Buy ISA because the amount you can save is higher, at £4,000, against £2,400. This means you could get your hands on up to £32,000 of free cash.
In addition, the LISA can be used to purchase a higher-value first home – worth up to£450,000. By contrast, the property price for a Help to Buy ISA is capped at £250,000 (£450,000 in London).
LIFETIME ISA CONS
Restrictions on the way the money can be used
The funds held in a LISA can only be used for a first home, or for retirement at age 60 or older.
You could be stung with a 25% penalty
If you are using the money to purchase your first home – or prepared to wait until you have turned 60 to use the cash to help fund your retirement – you can withdraw all the cash penalty-free.
However, in all other circumstances, withdrawals will be hit with a whopping 25% exit penalty (except in the case of terminal illness).
For example, if you’d saved the maximum for a decade, you would have £50,000 in your LISA (£40,000 of your own money and £10,000 from the Government). However, if you needed to get your hands on the cash for something other than your first home, you would be charged a huge £12,500.
Losing a quarter of the amount you take out if you withdraw without following the Ts and Cs is a pretty hefty sting in the tail you need to be aware of.
You cannot access funds until you reach 60
If you are using the LISA to save for your retirement, you need to be aware that your money will be trapped until you turn 60 (barring exceptional circumstances). This compares to age 55 for pension funds.
You must not view the LISA as an alternative to a pension
There are concerns that the idea of wrapping savings for a new home and retirement under one umbrella is confusing, and further muddles the murky world of pensions.
The risk is, if someone is saving into a LISA, they may think they are doing enough towards their retirement fund, and decide to opt of their workplace pension.
But the truth is, opting out is likely to be a bad idea in almost all cases, as you are giving up on tax benefits and extra contributions from your employer.
If you are aged under-40, you should not view the LISA as an alternative to a pension. You should view it rather as an additional saving option (alongside conventional ISAs and pensions).
Put another way, if you have an employer, a workplace pension should be the first port of call to pick up those valuable pension contributions.
There are fears that many people are still in the dark about the finer details of the LISA, and this may limit uptake.
In fact, research by broker, Selftrade, reveals that 85%of people would not feel confident explaining the product to a friend, with one in three stating they didn’t know enough about it to consider it as an investment option.
Equally, it’s not just investors and savers who are struggling, as only a handful of providers will be ready to launch on April 6, with many having highlighted the lack of guidance from the Government on the LISA – and concerns over how many people will take up the product.
This comes at a time when many providers are still implementing other regulatory changes to their systems.
All of this could mean that initially, at least, there are few accounts on offer – and particularly if you are looking to put your money in cash (as opposed to stocks and shares).
Risk of making the wrong decision when choosing between cash and stocks and shares
While giving people the option to have a cash or investment account is a positive feature of the new LISA, it is important that you make the right decision for your circumstances.
For example, if you’re planning on saving to buy your first home in the next five years, a cash LISA is likely to be the better option. The problem is, as yet, very few banks are offering one – plus returns are pretty miserable at the moment.
Equally, if you are planning on using the LISA to build up your retirement pot, an investment LISA could be more lucrative in the long term.
But if you do decide to invest, it’s important not to be lulled into a false sense of security, as there is always a level of risk to capital – even though you are investing via a Government initiative. The value of your pot depends on how well the stock market perfroms so it could go up or down.
All of this demonstrates clearly that while the LISA has many positives, it will not be for everyone.
The key, as with any financial product, is to be fully aware of your options before making a decision.
HIGHER EARNERS MAY WISH TO LOOK BEYOND A LISA
Higher and additional-rate taxpayers benefit from 40% or 45% initial tax relief on pension contributions – where as the bonus from a LISA is equivalent to basic-rate initial tax relief on pensions. So if you earn more there could be a greater benefit in going for pensions in preferences to LISAs.
TRANSFERRING A 'HELP TO BUY ISA' INTO A 'LISA'
While it is possible to hold both a Help to Buy ISA and a LISA, you can only use the bonus from one of them for your house purchase.
If you need to buy a home within a year, you might prefer to stick with the Help to Buy ISA.
If, however, you have a slightly longer time-frame, you might want to consider a LISA.
But if you are thinking about a LISA, you should be aware that you need to have the account open for at least 12 months to get the bonus cash for your first home.
For that reason, it may make sense to open a LISA now – with as little as £1 – just to set the clock ticking.
That way, if you don’t use the Help to Buy ISA by March 2018, you can then transfer it across to the LISA.
The only downside of this is the fact you only have the choice of stocks and shares LISAs right now. So, if you would rather have a cash LISA, it may make sense to hold off until the first of the cash LISAs launch in June.
Admittedly, all of this sounds rather complicated, which is why a lot of saving and investment experts are advising a “wait and see” approach right now.
Money Saving Expert has further details on the Lifetime ISA V Help to Buy ISA, and there is also a video guide below.
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