If you’re under 40, could a Lifetime ISA be the right savings choice for you?


young family get the keys to their new home

There are so many different options to think about when saving for the future that it can be hard to know which one is the right choice.

Do you put some extra money in your pension and let it grow for several years? Do you invest using stocks and shares? Should you open a savings account?

One option you may not have thought about is a Lifetime ISA (LISA), which could make sense if you are looking to buy a home.

Anyone aged between 18 and 39 can open a LISA and they are a great way of saving up a house deposit or to boost your later-life income.

But what exactly are the pros and cons of a LISA, and could opening one be right for you? Read on to find out more.

A Lifetime ISA could be good if you want to buy a house in the UK

Unlike a simple Cash ISA, a LISA isn’t for storing money and withdrawing when you need it. Instead, it can be an effective method of saving towards a deposit for a house or to boost your retirement savings.

You can contribute up to £4,000 into a LISA each tax year, and one of the key benefits is that the government will give you a 25% bonus on your contributions.

This is paid monthly and means that you could receive an extra £1,000 in government bonuses every tax year if you contribute the full amount.

Plus, a couple who are looking to purchase a house together are both able to contribute into their own LISAs, meaning that each they can both make use of the 25% bonus. This means that a couple could receive up to £2,000 in government bonuses every year.

There are two types of LISA:

  • Cash LISA – this works like a traditional savings account and will pay interest on your savings.
  • Stocks and Shares LISA – returns will be dependent on the performance of the assets (such as equities) your money is invested in. A time frame of five years or more is usually appropriate for this type of LISA.

Remember that a Stocks and Shares LISA does not afford the same capital security as a Cash LISA due to the nature of the underlying investments.

Anything you contribute towards a LISA forms part of your overall ISA allowance, which means you can still contribute up to £16,000 into a Cash or Stocks and Shares ISA.

Any withdrawals that you make are free of Income Tax and Capital Gains Tax (CGT). Note that you could pay a charge if you withdraw your savings before the age of 60 for a reason other than buying your first home – read more about this below.

The end of the 2021/22 tax year is 5 April, so be sure to maximise your contributions to a LISA before then, as you can’t roll over any unused allowance into the next tax year.

Even if you already own your home, if you’re under the age of 40 it may be worth opening a LISA and making an initial contribution. You can then contribute until the age of 50, benefit from the government bonus, and then draw the funds penalty-free from the age of 60.

Remember that you may pay a penalty for certain types of withdrawal from your LISA

Despite all the benefits, there are several reasons why a LISA may not be the right choice for you. One of the biggest is that paying into a LISA essentially commits that money to being used for a house deposit or saved for later life.

If you withdraw money from a LISA for anything other than a first house purchase before the age of 60, you will be subject to a 25% charge on the total amount that you withdraw. Depending on the performance of your LISA, this could mean that you get back less then you pay in.

Additionally, you must wait at least 12 months after making your first contribution into the account before you can purchase your own home using the government bonus.

One final downside is that the funds in a LISA cannot be used to purchase properties valued at more than £450,000. This could be a barrier depending on the kind of property you wish to purchase, and where in the country you live.

Get in touch

If you’d like more information on LISAs or other saving methods that may be more appropriate for your circumstances, email info@investmentsense.co.uk or call 0115 933 8433.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance and on encashment you may not get back the full amount you have invested.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, and levels, bases of and reliefs from taxation are subject to change.