LIFETIME ISAs

We believe that most young people should invest in a lifetime ISA (known as a LISA).

This should be a stocks and shares version, unless the purchase of your first home is going to fairly imminent, typically in the next three years.

Lifetime ISAs were primarily launched to help young people save for a house deposit. You can put in up to £4000 and the government will add an additional 25% i.e. up to £1000.

There are various caveats to be aware of but in essence if you cannot use it for a qualifying house purchase, you cannot access it without penalty until you are 60.

But is that so bad?

For basic rate tax payers, it is better than a normal ISA and a personal pension. The HMRC will give you a 25% bonus (free money) and will allow you to keep all of it tax-free, once you are 60. A normal ISA will give you no free money but allow you to access it whenever tax-free. And a personal pension will give you 20% tax relief (effectively 25% free money) but only allow you to keep a quarter of it tax-free, the rest is taxable. All three products grow free of Capital Gains and Income Tax.

The downsides? Because it is so good, you can only put in £4000 per annum, unlike a standard ISA, which is £20,000. The 25% uplift (max £1000) does NOT count as part of the £20,000 overall allowance. The penalty for early encashment is 25% of the fund value, not just the return of the free 25% at outset. For example, an investor invests £4000 and £1000 is added by the government. One year later, it is worth £5500 and an early encashment of the full amount is required. You would get back £4125. However, if the investment had stood still at £5000, you would get back £3750, a loss of £250. Also, you need to have held the LISA for a full 12 months, before it can be used for house purchase.

And why under 40? Lifetime ISAs (LISAs) are only available to people under 40 and can only be paid into until aged 50.

Also, if you have used the money in the LISA to buy a house, you can still contribute to it until aged 50, as a long-term savings/retirement vehicle.

So please get in touch if you think the LISA is for you or anyone you know.

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