For this week’s guide, Anna Bowes, savings expert from The Private Office, looks at what’s going on with Lifetime ISAs (also known as LISAs)…
A Lifetime ISA is a savings account that helps people save for their first home or retirement.
You can put up to £4,000 a year in the account, and the government gives you a 25% bonus of whatever you have deposited, meaning you can earn as much as £1,000 and it’s all tax-free.
You can open an account between the ages of 18 and 39, and you can keep adding to it until you are 50.
It’s important to note that anything you deposit into a LISA counts towards the total £20,000 overall ISA allowance.
But before you run to open one, there are lots of things to consider…
If you are using it to buy your first home, the property needs to cost £450,000 or less, and you need to have the account for at least a year to avoid any penalties.
If you are saving for retirement, you can start withdrawing cash at the age of 60 – taking anything out beforehand would be classed as an unauthorised withdrawal and a penalty of 25% would be applied.
Bowes says: “This sounds fair, as you received a 25% penalty on any deposits you made, but because this 25% applies to all contributions, it actually works out as an extra 6.25% penalty on your own deposits.”
Here’s an example:
If you deposited £4,000, got the £1,000 bonus and then needed to withdraw the full £5,000, you would need to pay £1,250. Assuming that no interest had been earned, you would receive the £3,750 of your original £4,000 deposit back.
“Penalty aside, the LISA can be a great savings account if you can stick to the rules – it’s brilliant for first-time buyers – and the latest figures from HMRC show that 56,900 people used one to purchase their first home in 2023-24. But, with house prices rising, the £450,000 limit can be a problem in some areas,” Bowes adds.
“In fact, earlier this year, a Treasury Select Committee asked for feedback on whether the LISA is still fit for purpose, which suggests there’s growing concern that it might need reform.
“While the LISA can be useful, it’s not always the best choice for everyone, so it’s worth thinking carefully about whether it fits your short and/or long-term plans.”
Here’s a look at the top LISA accounts currently on the market…
“The top two accounts are not actually offered directly by banks or building societies but instead they are financial apps that use various partner banks which will vary from time to time,” Bowes notes.
“So, you need to do your research, to check that opening a LISA with either provider will not take you over the Financial Services Compensation limit which is £85,000 per banking licence.”
