What is the Lifetime ISA?
Lifetime ISAs are savings pots for adults aged under 40 looking to save for two major life milestones – buying your first home and later in life, retirement. In a world where the average millennial can only dream of homeownership and the idea of having leftover cash to put away for retirement seems laughable, the LISA was supposed to be a savings lifeline. Indeed, the account can offer a considerable bonus to your own hard-earned cash. The premise is relatively simple – save as much as you like (up to £4000 annually) and the government will give you a 25% bonus on your cash at the end of the tax year.
So, in basic terms the government gifts you £1 for every £4 you deposit. If you’re fortunate enough to save the max amount of £4,000 annually, the Lifetime ISA could see you earn an extra £1,000 every year. The terms of withdrawal are strict however, with savers only able remove their cash from the ISA for two reasons: for the purchase of a first-time home under £450k, or once they’ve reached the age of 60. Any other withdrawals (bar terminal illness) will see holders of the account hit with a considerable penalty.
Why are MPs calling for it to be scrapped?
An extra £33,000 when you’re trying to claw your way onto the UK housing ladder or fund your retirement sounds like a thrifty move – so why are MPs so against the LISA? Just over a year after the ISA’s launch, a report by the Treasury Committee has called for them to be abolished, arguing the account was overcomplicated, and its “perverse incentives” had misled consumers. Indeed, whilst the rewards you can earn using the ISA are impressive, there are definitely some aspects of the LISA small print that savers need to be wary of.
Firstly, if you’re concerned you may have to withdraw your cash before the age of 60 for any reason besides purchasing your first home – be warned. The Lifetime ISA wields a considerable penalty of 25% for emergency withdrawals that could see you end up taking less cash out you put in. For example, if you save £100 the government will boost this to £125 at the end of the year. However, if you need to take this money out, you’ll be hit will a 25% exit penalty – meaning you’ll be able to take just £93.75 away.
There’s also a growing problem of savers who have signed up, only to find themselves trapped in a bad deal. The country’s largest provider of the stocks and shares Lifetime ISA, Hargreaves Lansdown, has recently decided it will no longer accept inward transfers - adding a considerable limitation on where LISA holders can go to upgrade their saving rates.
Crucially, MPs are concerned people will take up Lifetime ISAs instead of saving via their workplace pension – which is still the best deal for retirement. Workplace pensions come not only with tax relief, but also a contribution from your employer, so it’s important this method of saving is not abandoned in favour of the Lifetime ISA.
When is a LISA the best option?
If you’re self-employed or not don’t receive a workplace pension, the Lifetime ISA could be a valuable route to securing significant savings. So, for freelancers or those on zero-hour contracts, the account could be a great way to boost cash you’re putting away for later life. If you’re already saving in a workplace pension, stick with it! The release of the Lifetime ISA has not changed the fact that a pension with contributions from your employer is still the best deal for funding your retirement.
Similarly, if you’re a first-time buyer looking to save up for your first home outside the capital, the Lifetime ISA is a good tool for scrapping together cash for your deposit. You can use Lifetime ISA savings on any property under £450,000, as soon as 12 months have passed from when you opened your account. London residents, your options are a little less optimistic. The LISA might be useful for retirement savings, but with the average first-time property costing £420,000, prices are dangerously close to the upper limit of the ISA. Ironically, some first-time buyers may find properties are so unaffordable that they don’t qualify for the help-to-buy aspect of the LISA.
For those with clear and committed savings goals for home ownership or retirement, the Lifetime ISA could be a helping hand to reaching your financial targets. Of course, the big red flag is that MPs have already pushed for the ISA to be abolished. The government could well scrap the product altogether – but bear in mind this drawback applies to all tax perks.
Overall, like any savings product, be wary – the ISA can offer an excellent boost to your savings pot, but it comes with considerable restrictions. So, do your research first, and check the account is the best fit for your financial plans.