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  • Five years of the Lifetime ISA – how over half a million people got a government bonus

    The Lifetime ISA (LISA) was introduced in April 2017. Since then, it’s estimated over half a million people have paid into one. Here’s everything you need to know if you’re considering opening a LISA.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    LISA’s continue to grow in popularity. Latest HMRC data shows 154,000 LISAs were paid into in the 2017/18 tax year, and this increased to an estimated 545,000 by 2019/20.

    With the LISA celebrating its 5th birthday this year, here’s everything you need to know if you’re considering opening your own, including how they compare to Help to Buy ISAs.

    We hope you find this article helpful, but it isn’t personal advice. ISA and tax rules can change, and any benefits depend on your circumstances. If you’re not sure what’s right for your situation, ask for financial advice.

    What is a Lifetime ISA and how does it work?

    A LISA offers a tax-efficient way to save or invest towards your first home or retirement. You can open a LISA between the age of 18 and 39 and pay in up to £4,000 every tax year. In return you’ll get a 25% bonus from the government. This means you could get up to £1,000 for each year you save.

    You won’t pay UK income tax on any savings income within a Cash LISA. If you have a Stocks and Shares LISA you don’t need to worry about paying UK income tax on dividends, or capital gains tax either.

    After 12 months from the first payment, you can use the money for a qualifying first-time home purchase. Once opened, you can also continue to pay into a LISA until you’re 50 and withdraw money from age 60 without paying the 25% early exit penalty. This means you could use it to generate a retirement income that’s free of UK income or capital gains tax.

    Remember, unlike the security offered by cash, all investments fall as well as rise in value so if you choose to invest, you could get back less than you put in.

    The Lifetime ISA early exit penalty

    The purpose of a LISA is to help people save for their first home or for retirement. If you take money out for any other reason, you’ll normally need to pay a 25% government withdrawal charge on the amount you take out. While it might look like you’re just giving up the government bonus you received, it’s slightly more complicated than that.

    For example, if you put £4,000 into your LISA, you would receive the 25% government top up bringing the total of your LISA up to £5,000. Let’s say your LISA was still valued at £5,000 when you wanted to make a withdrawal before age 60 that wasn’t for a qualifying home purchase. If you then withdrew that £5,000, you would pay a 25% charge on that amount which comes to £1,250 – eating into your savings.

    A second issue is that people can only use their LISA to purchase a UK home worth £450,000 or less. If your dream first-home costs more than that, the same charge will apply if you withdraw money from your LISA to help fund the purchase.

    More on the Lifetime ISA

    More on the Lifetime ISA for retirement

    Who might benefit from using a LISA the most?

    1. First-time buyers

    First-time buyers struggling to save could really benefit – the government bonus can boost savings towards your first home. And it could even mean that you build up your deposit quicker.

    A first-time buyer in England putting away 20% of their income (after tax), takes seven years on average to save for a 15% deposit on their first home, but this can vary depending where in the country you want to live. If you saved the maximum into a LISA for seven years, you could end up with an extra £7,000 towards your house deposit. And if you’re buying a house with your other half, who’s also a first-time buyer and they did the same, that’s up to an extra £14,000 in seven years.

    Find out how much LISA bonus you could get

    2. Self-employed

    A LISA could offer a more tax-efficient way to save for retirement if you’re a basic rate tax payer – as you won’t benefit from employer pension contributions in the traditional sense, the LISA bonus could beat the pension tax relief you get on pension contributions. This is because any money from a LISA isn’t taxable when you withdraw it from age 60. Whereas with a pension 25% is tax free, the rest is taxable as income from age 55 (rising to 57 in 2028).

    If you're put off by the idea of having to commit to regular contributions, don't be. Some LISAs, like the HL LISA offer flexible payments. This can be useful if you work for yourself. You can stop and start regular payments or make one-off lump sum payments depending on how well your business is doing.

    More on LISAs for the self-employed

    3. Employed basic taxpayers

    If your employer offers a workplace pension, and you qualify for it, that should be your first port of call for retirement savings, especially if they offer salary sacrifice. But once your employer is making pension contributions at the maximum level, or you don’t qualify, then a LISA could be a more tax-efficient choice for any additional retirement savings.

    Paying into a LISA won’t change your State Pension entitlement, however it could affect some means-tested state benefits.

    DOWNLOAD LISA VS PENSION FACTSHEET

    Best LISA providers

    When deciding which LISA provider is best for your needs, check whether the investment choice available matches your attitude to risk and your financial aims if you’re planning to invest. You should also check what fees you’ll be paying and how easy it is to manage and access your account online. Each provider will offer different LISA features and benefits.

    More on the HL Lifetime ISA, including charges

    Remember your annual ISA allowance

    Anything you pay into a LISA forms part of your annual ISA allowance (currently £20,000). So if you’re contributing to other ISAs, make sure you keep track of how much you’ve put in.

    You can also only subscribe to one ISA of each type, each tax year. For example, you couldn’t pay into two LISAs held with different providers.

    New Year's cash prize draw - win what you pay in

    If you pay into your HL LISA by 23 February, you could win back what you pay in up to £3,000.

    Total new payments of £100 or more made between 1 December 2021 and 23 February 2022 will count towards your potential cash prize. There will be seven winners of up to £3,000 each.

    Full terms apply.

    How are LISAs and Help to Buy ISAs different?

    Both LISAs and Help to Buy ISAs are designed to help people get a foot on the property ladder. You can have both, but there are some key differences between the two.

    The first thing to know is, Help to Buy ISAs are no longer available to new applicants. However, if you’ve already opened a Help to Buy ISA, you can continue to save into it until 30 November 2029.

    Both accounts offer a 25% government bonus. You can pay in a maximum of £2,400 a year into a Help to Buy ISA (after the first year). With a LISA, the maximum you can put in is £4,000 a year.

    With a Help to Buy ISA, your payments can be a maximum of £200 a month. So if you miss a contribution one month you can’t necessarily make it up the next month. These restrictions don’t apply to a LISA.

    Help to Buy ISAs are also for cash savings only. With a LISA you can choose between a Cash LISA or a Stocks and Shares LISA. Also, while the first home you purchase with a LISA must be worth £450,000 or less, a Help to Buy ISA covers first-homes worth up to £450,000 in London, but only up to £250,000 elsewhere.

    More on the HL Lifetime ISA

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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