The Lifetime ISA has been referred to as the government’s ‘silver bullet’ when tackling the two main savings challenges of buying a new home, and contributing to a pension. You’re busy; you need a summary of what it is, what it does, and what you need to be aware of. Luckily, we’ve done just this.
What is the Lifetime ISA?
First things first; what are we actually talking about? Well, assuming you know it’s a new type of ISA, here are its main features:
- It’s the Government’s idea.
- It’s also referred to as a LISA.
- You can open a LISA once you’re over 18 and under 40 (as at 6th April 2017).
- You can make contributions up until your 50th
- There’s no minimum or maximum monthly amount. Until you read the thing below.
- You can pay in up to £4,000 per year.
- The government will then contribute an additional 25% of what you’ve paid in, i.e. up to £1,000 per year.
- The money can only be withdrawn tax-free if used to buy your first home, or if you’re over 60, or if you have been diagnosed with a terminal illness.
- You can only use it to buy a property up to the value of £450,000, and it must be in the UK
- If you withdraw the savings outside of the above circumstances, you will then forego the government contribution, and will be charged an additional 5% fee of what you withdraw.
- If used towards a house, the limit is on the individual, not the property. So two people can use two separate LISAs towards a single property as long as they’re both first-time buyers.
- LISAs will not see savers benefit from employer contributions as with workplace pension schemes.
A 25%, tax-free top-up on what you save. The LISA is designed to encourage young people to save towards a house and their future beyond. If young savers sign up to it as soon as they start working, it will encourage a healthy savings habit. If you invest in a LISA for the maximum available time, you can receive a bonus of up to £32,000 which is more generous than that of the Help-to-Buy Isa.
In case of an emergency, it is possible to withdraw the money at any time, unlike a pension. However, this should be considered very carefully due to the loss of the government bonus and the 5% penalty. It also provides the self-employed with a practical and measurable savings vehicle.
You can’t really save for both a home and retirement with only the LISA
Many people – particularly young people at the start of their careers – will not necessarily be able to afford paying into a workplace pension scheme as well as a LISA. This is the big concern for the majority of experts, who are warning against using it as an alternative to a pension scheme. Although the LISA actively helps people buy a first property, it does mean that once the savings have been used, it’s back to square one in terms of saving for retirement. This could mean that many people will be well into their 30s before making contributions towards a pension. Currently, the LISA cannot be used for auto-enrolment, so this should be a consideration as well.
Having said this, if you are in a more stable position, say, in your mid- to late-twenties and beyond, you’ve already been contributing to your pension for a few years, and you’ve got some extra to put away on top of this (while still covering the bills), then the LISA could be a valuable savings vehicle for you.
Early withdrawal penalties
Yes, you can access the money you’ve saved if you need it for an emergency, but you will lose 30% of your savings (25% is the government top-up, 5% from your own contributions). However, the type of emergency which requires this amount of money instantly is never something you want to pay out for; writing off a car and needing to buy a new one; emergency healthcare; or, worse still, a funeral. So, the LISA does present the risk that you could stand to lose a huge amount of money if you find yourself in one of these already unfortunate situations.
Although plausible, statistically speaking, Millennials are lucky insofar as we rarely find ourselves in the situation of having to deal with healthcare and funeral costs. Normally, our parents and grandparents are able to take the bulk of the financial burden before the responsibility falls to someone of our generation. Younger people will hopefully find that we do not have to consider this type of expenditure until later in life, after two or so decades of saving. So, most Millennials will not have to resort to an early withdrawal. For the very unfortunate few who do have to deal with healthcare or funeral costs, the burden of losing 30% of our savings would exacerbate the financial and emotional strains of the situation.
Use it in addition to a pension, not as an alternative
Although a lot of opinion has suggested there are more negatives to the LISA than positives in terms of how practical it is, the majority agree this it is a great savings mechanism when used in conjunction with a pension. It’s widely acknowledged that the employer contributions and tax savings which come into play still make a pension scheme the best long-term saving option. That said, having an additional savings option which specifically encourages young people into good savings habits can’t be a bad thing. As with any savings plan, it just needs to suit the right type of person in the right type of situation.
Communication is key
The LISA can be great, but people need to know exactly what they’re signing up to. The risks which accompany a LISA must be explicitly communicated to your employees. Taking them through what they can realistically save, and what bonus they can achieve on top of this will help them to make an informed decision, provided they are absolutely geared towards saving for a home or retirement. You also need to make employees aware that they may breach their ISA limit if they also have an ISA or LISA elsewhere.
If you haven’t already done so, investing in financial education as part of your employee benefits scheme could really help with getting to the right decision for a myriad of different employees. Obviously, the LISA isn’t suitable or sustainable for everyone, but Nudge Global’s Financial education; the definitive guide 2016 report found that 77% of respondents wanted employers to include their employees’ personal finances as part of a financial education offering. If the LISA, or perhaps an alternative ISA is going to really help an employee make measurable steps towards a goal, then offering assistance in getting this sorted for an employee will go a long way to bolstering your employee engagement.