The tax year and the LISA

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A few days into the new tax year and there’s a lot of talk about the new Lifetime ISA (LISA). If you’re unsure what LISA is about and how it works, here are the key things to remember:

The Lifetime ISA was designed for two reasons — to help those under 40 save towards the purchase of their first home, or, for retirement. If someone decides not to use their LISA savings to buy a property, the money can be used in retirement or once they have reached the age of 60. The LISA comes with certain strings attached, so here’s what you need to think about before opening an account.

LISA summary

  • You must be over 18 but under 40 to open a LISA. You can save until you are 50.
  • The money can be used towards the purchase of your first home or for later in life (retirement).
  • The annual savings limit is £4,000, which can be invested in cash or stocks & shares.
  • The government will pay 25% bonus every year on what is invested — that’s 25p for every £1 saved. The maximum bonus contribution over the lifetime of the LISA is capped at £32,000 (the maximum shelf life of a LISA is 32 years). The bonus is paid annually, but from April 2018 it will be paid monthly.
  • The money can be used to purchase a residential property worth up to £450,000 anywhere in the UK. If you live in London or the South East this may be very difficult to get round and you should consider your options carefully.
  • If you decide to withdraw the money, there’s a 25% penalty. That means you will get back less than what was originally put in, so it’s important to make sure that you won’t need your money in the short term and that you’re happy to lock it up in this way.
  • With the overall annual ISA limit at £20,000 it is possible to have a LISA (and invest up to £4,000) and use the remaining allowance in other ISAs. You can also hold a help-to-buy ISA but you’ll need to move quickly as it’s set to close to new business in November 2019.

For now, LISAs are only available on Hargreaves Lansdown, Nutmeg and The Share Centre. Other providers are waiting to assess consumer demand before setting one up.

If you would like to read about the reasons to invest in an ISA click here.

To run your own ISA comparisons on platforms click here.