Lifetime ISA – Why You Need To Open One (UK)

Lifetime ISA – Why You Need To Open One (UK)


The Low Down

In short – The Lifetime ISA (LISA) allows you to save up to £4000 a year in which the government will match any deposit by adding an extra 25%. Therefore if you pay in the full £4000 deposit every tax year, the government will give you a cash bonus of £1000.

A picture representing a bank ISA

The LISA allows you to save either for you FIRST home or retirement*, and can be opened between the ages of 18-40. If you don’t want to use it towards your first home and want to use it as another retirement fund then you can pay in to it every year AND get the government bonus until you hit age 50. (Meaning the maximum bonus is £33,000 if you open it at 18 and pay in £4000 a year until you hit 50).

Finally, if you are looking to open a LISA for your FIRST home, then you need to have the account open for 12 months before you’re allowed to withdraw. So I’d say open up the account as quickly as possible! Bear in mind, it can be opened with the minimum deposit possible – with MoneyBox this is £1.

*Note – If you are using the LISA for your retirement fund, you can only access and withdraw the money without penalty at the age of 60.

Earning Interest/Stock Yields

When opening up a LISA, you should look for the bank/building society that is offering the best interest rate as you can also earn compound interest on your balance. Currently, MoneyBox is offering a rate of *1.1% AER which on a balance of £5000, (£4000 + £1000 government bonus) is around £60 a year. However, you’d be opening up a LISA for the government bonus rather than the interest here. *As of July 2020.

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Furthermore, it is important to think about which type of LISA you are interested in. There are two types of LISAs: A Cash LISA, and a Stocks & Shares LISA. If you are looking to buy your first home with the LISA, it is probably more wise to open up a Cash LISA as you cannot risk short term losses on your balance. However, it may be more shrewd to open up a Stocks & Shares LISA if you want to use it as a retirement fund, as you can hopefully have a greater earning potential.

Treasury Update

Update 5 May 2020: The Treasury has said LISA holders who withdraw money will effectively face no penalty until next April 2021. Previously, you were charged 25% of the amount withdrawn unless you’re over 60 or buying your first home. Now, there’s a reduction in that charge to 20% until April 2021, which is effectively equivalent to the bonus being taken back.

When Can You Withdraw Penalty Free? 

  • For your FIRST home, under £450,000 and your account has been open for a 12 month period.
  • At the age of 60 used as a retirement fund.
  • Terminally ill with 12 months to live.

Are LISAs Worth it?

Personally, I think LISAs are a really good tax free savings account. For anyone who is looking to buy their first home (under £450,000) then using the LISA to build up a good deposit makes sense. Where else can you get a 25% bonus on a £4000 amount + interest?

If you are looking for an extra retirement fund; then it get’s a little more complicated. Anyone who works for a company that pays into their pension should still be contributing as much as possible in their own pension fund before opening a LISA. BUT, if you can afford another pension fund OR you’re a free lancer and self employed then using the LISA is a great way to supplement your funds nicely.

I personally own a LISA with MoneyBox – as I said above, they currently have the best interest rate. Additionally, the fact that a LISA is tax free savings and only takes up 20% of your annual tax free savings allowance I’m not sure why anyone wouldn’t want to take advantage of this ISA.

*Disclaimer – 3MoneyTalk is not a professional financial advice hub and the opinions on this article are just that – opinions. We use our own personal experiences with financial products to give our opinion on why we think something is a good idea or a benefit.

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