Dominic Browning, Managing Director
Posted by Dominic Browning
News, Resources, Insight and Opinion from Browning Financial Planning

Lifetime ISAs - Why basic-rate tax-payers under 40 should consider them.

Dominic Browning, Managing Director
Posted by Dominic Browning

Lifetime ISAs were created to help people under 40 save for a house deposit. But are they any good as long-term savings if you do NOT buy a house?

Young people saving for a deposit should generally save in a cash lifetime ISA. However what happens if that person ends up keeping the lifetime ISA for the long-term as an investment?

If so, firstly, you should be in a stocks and shares lifetime ISA, NOT a cash one. Cash is good for short-term savings but not for long-term investing.

Secondly, viable alternatives to lifetime ISAs are standard ISAs and pensions. Assuming you hold the investment to at least aged 60, the differences are as follows for a basic-rate tax-payer.

The standard ISA receives no tax relief on the contributions but 100% of the proceeds are tax-free. So you get no free money.

The pension receives 20% tax-relief on the contributions but only 25% of the proceeds are tax-free, thus a notional tax rate of 15% is payable on the pension as a whole. So you get 5% free money (20% - 15%).

The lifetime ISA receives a 20% uplift on the contributions and 100% of the proceeds are tax-free (after aged 60). So you get 20% free money.

So a stocks and shares lifetime ISA is better than the other options for a basic-rate tax-payer investing for the long-term.

The downside is you can only invest £4000 per year, whereas a standard ISA can receive £20,000 and a personal pension up to £60,000. The £4000 contribution will form part of the overall £20,000 ISA allowance.

You can only invest in a lifetime ISA before age 40 and you can only contribute up to aged 50.

These figures assume you hold the investment to age 60. If you encash your lifetime ISA before then, you will face a 25% charge, meaning you will get back less than you were given. This makes the lifetime ISA poor value for money ,compared to the alternatives.

The 25% early encashment penalty does NOT apply if ALL of the following criteria are met: You are buying your first house, the purchase price is under £450,000, you are buying it at least 12 months after you first contributed to the lifetime ISA, you are buying via a solicitor and you are using a mortgage.

If you are terminally ill and given 12 months or less to live, the early encashment penalty will be waived.

Unfortunately there is a lack of providers of stocks and shares lifetime ISAs. However our chosen platform, Fundment, will be offering one soon.

For young people, who are basic rate tax-payers, the lifetime ISA is the best investment plan for retirement.

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