This content is for information and educational purposes only. It should not be taken as financial advice or investment advice. To receive tailored, regulated financial advice regarding your affairs please consult us here at Hanson Financial Services (financial advice in Liverpool).
Are you looking for an efficient way to buy a first home or save for retirement? With a Lifetime ISA (or LISA), it can be much easier to do so. The Lifetime ISA is a scheme designed by the UK government to encourage – and aid – people in savings towards key milestones in their life. In this article, our Liverpool-based financial planning team here at Hanson Financial Services shows how a LISA works, benefits and drawbacks to consider and ideas about how it can be included within a wider financial plan.
How a Lifetime ISA works
Generally speaking, to open a LISA (or Lifetime ISA) you need to be a UK resident, over age 18 (but under 40) and only use it to buy a first home or towards retirement. You can keep putting money into it until you turn 55.
Up to £4,000 can be committed to an ISA each tax year (i.e. 6th April – 5th April). Provided you are under 55, the government will add a 25% “bonus” to your contributions – capped at £1,000 per year. You can hold cash, investments or both within your LISA.
There are a wide range of LISA providers in the UK including those offered by highstreet banks and by online investment platforms. These companies all have the same aforementioned LISA features, but may vary in their costs (e.g. investment management fees) and the investment opportunities they offer you. Some may limit you to their own funds, for instance.
When it comes to taking cash or capital from your LISA, you can only do so in three situations: to buy a first home, if you are over age 60 or if you are diagnosed with a terminal illness which means you have less than 12 months left to live.
Benefits & drawbacks
Those looking to save efficiently for a first home will likely find the LISA extremely competitive. Suppose you and your partner are saving for your first property and you each open a LISA. If you both commit the maximum £4,000 per year to your accounts, then that’s £8,000 in savings and £2,000 from the UK government each year. This is setting aside any interest or investment growth you may also generate along the way – which are tax-free! The main drawback is that the money in a LISA is locked away until you use it for a first home purchase – or after your 60th birthday. If you need the funds urgently for another purpose (e.g. a family emergency), then you most likely will be unable to access it without a hefty penalty.
For retirement savers, however, the decision about saving into a LISA can be a more difficult decision. The UK government bonus is certainly attractive, for instance, and there are certain advantages to a LISA over a pension. In particular, a LISA has no overall limit on how much you can save into it; unlike a pension, which is capped by the Lifetime Allowance (i.e. £1,073,100 in 2021-22). ISAs are also, arguably, less in the crosshairs of the UK Government, compared to pensions, when it comes to finding cost savings for the public purse.
However, the LISA does have drawbacks compared to pensions. First of all, more can be put into a pension each tax year through the annual allowance – up to £40,000 rather than £4,000. Secondly, the UK government “tops up” pension contributions via tax relief. For a Higher Rate taxpayer, this amounts to a 40% boost; much better than the 25% offered under the LISA. A third benefit to defined contribution pensions is that they can be inherited by beneficiaries with no inheritance tax (IHT) liability. Anything held in a LISA, however, is subject to IHT. Finally, a LISA can only be accessed from age 60 (if not used for a first home), whilst a private pension (and workplace defined contribution pensions) can be accessed from age 55.
Considerations for financial planning
The suitability of a LISA – Lifetime ISA – will depend on your financial goals, current asset base and your position in your lifespan. If you are nearing retirement, for instance, and cannot put more money into a pension due to the limits of the annual allowance, then you could consider putting this in a LISA instead. Another consideration is your employer pension contributions. If you do not have access to this (e.g. because you are self-employed) then a LISA can be a more attractive option for retirement saving, since you are not benefitting from auto-enrolment. Your income also matters. If you are on the Basic Rate, then the 20% bonus offered by the LISA will be better than the 20% tax relief offered by pension tax relief. For those on the Higher and Additional Rate, however, pensions will likely be more attractive.
Conclusion & invitation
Are you interested in talking to a financial adviser about your pension and investment planning needs? We’d love to assist you here at Hanson Financial Services.
You can call us on:
Liverpool Office: 0151 708 7616
Manchester Office: 0161 401 0991
Chester Office: 01244 960 039Or email via: [email protected]