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With a contribution of up to £1,000 a year from the government, Lifetime ISAs make a viable option for savers who are in it for the long run.
Our guide looks at how they work and who they are suitable for as well as their pros and cons.
ISAs (Individual Savings Accounts) are savings accounts that allow you to avoid paying taxes on the interest you earn.
As the name suggests, Lifetime ISAs (or LISAs) are a type of ISA that last for a long time, but not forever.
If you decide to put money in a LISA, you earn from your savings in two ways:
A LISA gives you good value for your money – but only if you’re ready to accept a series of conditions.
LISAs are a bit complicated, so here are the main features you need to know about:
The main purpose of a Lifetime ISA is to help you save money for a comfortable retirement. You have three main options when it comes to getting your savings back:
(We know what you’re thinking… if they gave you a 25% bonus, and in order to withdraw the money in advance you have to pay a 25% fee, where does that 6.25% come from? The answer is, it comes from the fact that they’ll calculate the 25% fee on the whole sum, including the extra 25% you’ve already been given. For example, if you put in £4,000, you’ll get an extra £1,000. If you want to withdraw the money, you’ll have to pay 25% of the £5,000 as a fee – that is, £1,250. It amounts to a £250 net fee, which corresponds to the 6.25% of your initial £4,000.
So basically, the main benefit of a Lifetime ISA is that it grants you a conspicuous government bonus that you can use both to buy your first house or to guarantee yourself a comfortable retirement – and you can start saving and earning without having to make a definitive choice from the start.
You’re not forbidden from having more than one single Lifetime ISAs, but you cannot pay money into more than one of them in a single tax year.
If you’d rather have one Lifetime ISA for retirement and another one to buy your first house, you can do that, but you’ll have to pay into them in alternate years. Also, the £4,000 yearly limit is a strict one you won’t be able to bypass.
As with most financial products, it really depends. A free 25% boost to your savings is not to be brushed off, but equally, don’t let the mirage of easy cash blind you.
LISAs are viable options both for buying a house and for saving for retirement, but in some cases, they aren’t the best option for either.
For example, have you considered increasing your pension contributions? When you put money into your pension, you get tax relief on it – it’ll be worth at least 20% and even more if you’re a high-rate taxpayer. Since the money you put in your LISA has been taxed at the source (when your salary was paid to you), and you cannot get more than the 25% back, pensions can ultimately turn out more rewarding.
Moreover, if you need to claim government benefits, for example because you find yourself unemployed, you may need to withdraw your LISA before becoming eligible to do so, but pensions don’t count – and the same is usually true for bankruptcy cases.
On the other hand, if buying a house is your main focus, you should also look at Help To Buy ISAs. The government bonus can reach a maximum of £3,000 only, but you can get the money back whenever you need it without paying any fee.
If you’re considering both options but aren’t really sure of what you want to do with your savings, LISAs are a smart choice. But never forget that you must really be confident that you won’t need the money you put aside any time soon. If you withdraw it in advance, the bill will be depressingly expensive.
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