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Word of the week – Lifetime ISA (LISA)
A Lifetime ISA or ‘LISA’ is a government-backed savings scheme designed to help UK residents save for their first home or retirement. Introduced in April 2017, the LISA provides a tax-free way to save with the added benefit of a government bonus.
To open a LISA, you must be between 18 and 39 years old. You can save up to £4,000 each tax year until you turn 50. The UK government adds a 25% bonus to your contributions, up to a maximum of £1,000 per year. This means that if you save the full £4,000 annually, you will receive an additional £1,000 from the government, boosting your annual savings to £5,000.
There are two types of LISAs: Cash LISA and Stocks & Shares LISA. A Cash LISA works like a traditional savings account, offering interest on your deposits. A Stocks & Shares LISA invests your money in the stock market, potentially offering higher returns but with greater risk.
You can withdraw funds from your Lifetime ISA without penalty under specific conditions:
- Buying Your First Home: You can use the savings, including the government bonus, to purchase your first home valued up to £450,000. The purchase must be made at least 12 months after your first contribution to the LISA.
- Retirement: Funds can be withdrawn without penalty after you turn 60.
- Special Circumstances: If you are terminally ill with less than 12 months to live, you can withdraw your money without penalty.
For other types of withdrawals, a 25% charge is applied. This charge recovers the government bonus and applies an additional small penalty to your original savings, ensuring that early withdrawals are discouraged.
The primary benefit of a LISA is the 25% government bonus, which significantly enhances your savings. Additionally, any interest, dividends, or capital gains earned within the LISA are tax-free. This can make a substantial difference over time, particularly if you start saving early.
While the LISA offers attractive benefits, there are some considerations to keep in mind. The annual contribution limit of £4,000 may be restrictive for some savers. Also, the penalties for early withdrawal can be significant if you need access to your funds for reasons other than buying your first home or retiring.
Photo credits: Pexels
It is also prudent to point out that the maximum value of your first home, currently at £450k, could be problematic for many first-home buyers, particularly those looking to buy in London where the average value of a property is currently just under £700k.
Sadly this figure has failed to be amended in line with inflation in the housing sector.