The Lifetime ISA (LISA) is a financial product designed to help people save and invest for their first home, retirement, or both. You’re able to open one if you’re aged between 18 and 39, and you can put in up to £4,000 per year until you turn 50. But there are problems with LISAs, so is saving and investing in a Lifetime ISA worth it? In this guide we weigh up the pros and cons of this unique investment vehicle.
The advantages of the LISA
There are three main advantages of the Lifetime ISA.
The first is that contributions come with a 25% bonus from the government. Given that the annual allowance is £4,000, this means that you can potentially pocket £1,000 for free every year up to the age of 50. This is a very generous deal, and it can really boost your savings over time.
The second is that if you’re using it for your retirement savings, you can access all your capital tax-free at 60. This benefit shouldn’t be ignored. Compared to a SIPP (where you can only access 25% of your money tax-free) the LISA could be more tax efficient.
The third advantage is that if you go with an investment LISA from the likes of Hargreaves Lansdown or AJ Bell (some providers such as Skipton only offer cash LISAs), you have access to assets that can grow your wealth quickly. For example, you could put your money into a global index fund such as the Vanguard FTSE Global All Cap Index. These types of funds typically return about 7-10% per year on average over the long term.
The drawbacks of the LISA
The main drawback of the LISA is that you can’t access your money until you either buy your first home or turn 60. So, it’s quite restrictive. If you do try to withdraw your money before this, you will be hit with a 25% penalty, which means you could get back less than you put in.
Another drawback is that there are conditions when it comes to buying your first home. Currently, the house price limit is £450,000. This could be a problem if you live in certain parts of the UK such as London where house prices are high.
Is the LISA worth it?
Given its pros and cons, the Lifetime ISA is going to suit some people more than others.
One scenario in which it could be worth it is if you’re using it as a retirement savings vehicle. In this scenario, you could potentially pick up £1,000 per year from the government up to the age of 50 and then access your money tax-free at 60.
Another scenario where it could be worth it is where you’re saving for your first home and you’re confident that this home will cost less than £450,000. In this scenario, pocketing bonuses from the government could be very valuable.
Where it’s probably not worth it is if there’s a chance you’ll need access to your savings in the years ahead (not for the purchase of your first home). Because if you have to withdraw your money, you’re going to face a 25% penalty charge.
It may also not be worth it if you’re saving for your first home but considering buying a property worth more than £450,000. In this scenario, you might be better off saving and investing within another type of account such as a Cash ISA or Stocks and Shares ISA.
Summary
- The Lifetime ISA is designed to help people save and invest for their first home, retirement, or both.
- You can open one if you’re aged between 18 and 39 and contribute £4,000 per year up to the age of 50.
- Contributions come with a 25% bonus from the government.
- Saving into a LISA could definitely be worth it if you are using it as a retirement savings vehicle.
- If there’s a chance you’ll need access to your capital in the years ahead, a LISA is probably not worth it as there is a 25% penalty charge.
Based in London, Edward is a distinguished investment writer with an extensive client portfolio comprising a diverse array of prominent financial services firms across the globe. With over 15 years of hands-on experience in private wealth management and institutional asset management, both in the UK and Australia, he possesses a profound understanding of the finance industry.
Before establishing himself as a writer, Edward earned a Commerce degree from the prestigious University of Melbourne. Complementing his academic background, he holds the esteemed Investment Management Certificate (IMC) and is a proud holder of the Chartered Financial Analyst (CFA) qualification.
Widely recognized as a sought-after investment expert, Edward’s insightful perspectives and analyses have been featured on sites such as BlackRock, Credit Suisse, WisdomTree, Motley Fool, eToro, and CMC Markets, among others.
You can contact Ed at edward@goodmoneyguide.com
