Investing in LISAs may seem like a ‘no-brainer’ - but be alive to the rules
Monday 21st November 2016
Written by Martin Upton
From next April those aged between 18 and 40 years will be eligible to open up Lifetime Individual Savings Accounts – or LISAs – to save towards the purchase of a first property or to provide funds in later life, from the age of 60. Each year up until the age of 50, up to £4000 can be invested in a Cash or Stocks & Shares LISA with the government providing a 25% bonus on the amount placed into the account.
For those saving the maximum amount of £4000 per year for the full period of 32 years, from the age of 18 until 50, bonuses totalling £32,000 will be received. But be aware that the product has many rules and some associated financial risks which you need to be alive to.
For those using a LISA as first-time home buyers the cost of the property must not exceed £450,000 and the LISA must have been opened for at least a year before it can be used to assist in the purchase. LISAs cannot be used for property purchase if you are not a first-time buyer, for properties which are not going to be used as your residence or for purchases outside the UK.
Despite the strict rules, using LISAs to get onto the housing ladder is really a ‘no-brainer’ provided one key pitfall is avoided. If you take funds out of your LISA account prior to using them for a property purchase you will have to return the government bonus proportion of the withdrawn sum plus an additional 5% charge on top. So, to provide an example, if you save £4000 in a LISA for two years at the end of this period and if there is no investment growth during this period your account will have grown to £10,000 courtesy of the two £1000 annual bonuses. But if you then withdraw all the funds without using them for a first-time property purchase you will have to return the £2000 of government bonuses plus 5% of the balance (£500) – a total withdrawal fee of £2500 (25% of the balance). This would leave you with £7500. So you will have lost all the bonus money plus £500 of your own money that you had originally invested in the LISA.
Those using LISAs for an income in later life will also have this withdrawal fee applied if funds are withdrawn before reaching the age of 60 unless they are diagnosed with terminal ill health. But there are other considerations to take into account too. If you pay into a LISA instead of paying into a pension you will lose out on the contributions that your employer may make into your pension fund. Additionally you will lose out on the tax relief gained on pension contributions, up to the annual ceiling of £40,000, if you save money in a LISA rather than place it into a pension scheme. This would be particularly costly for higher-rate tax payers.
Whilst you cannot add to your LISA account or get the annual bonus from the age of 50 the funds accumulated can only be accessed, without a withdrawal fee being applied, from the age of 60. You will, though, continue to see the interest and other earnings from your LISA investment added to your account in the interim. From the age of 60 you can access the money in your LISA account at your discretion to provide a source of income, with the withdrawn money not being subject to income tax.
Perhaps the other consideration that should be given by those planning to use LISAs to provide an income in later life is that the rules applying to the scheme could change in the long time period (of at least 20 years) between opening a LISA and using the money accumulated. But, as we have seen in recent years, the rules and tax-breaks applying to conventional pension schemes can change too.
Overall LISAs are a good innovation and will help first-time buyers and those planning their income for later life – but make sure you know the rules and the potential pitfalls.
*Martin Upton is Director of the True Potential Centre for the Public Understanding of Finance (True Potential PUFin)
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