In the headlines you’ll have heard how you can save up to £4,000 a year, and the government will top up your savings with a 25% bonus, which sounds like an incredible deal.
But how does it work? What do you need to know about LISA? Find out here…
What is a Lifetime ISA?
A LISA, like any ISA, is an individual savings account (hence ISA). LISA stands for Lifetime ISA, and it is simply a long-term ISA.
The government wants to encourage individuals to save money, especially for their retirement, and so they have designed ISA products to be tax efficient.
In a conventional savings account, you have to pay tax on the interest your savings earn, but in a cash ISA, the interest isn’t taxed. Any interest you earn, you keep.
Following the introduction of the Personal Savings Allowance (PSA), a basic rate taxpayer (20%) can now earn £1,000 of savings interest in a year tax free. While a higher rate taxpayer (40%) can earn only £500 of savings interest tax free in the same year.
How Much Can I Save?
Under current plans, you will be able to deposit up to £4,000 in a LISA each year, and each person will be able to have one account.
You will be able to do this from the time you open the account until you reach 50; no bonus will be paid for savings after this point.
If you opened your LISA on your 18th birthday (as soon as you became eligible for a LISA), paid in the maximum amount each year from then on until you were 50 and didn’t withdraw anything, you could save £128,000 in your account.
The interest and the bonus would be on top of this amount.
How Much Is The Bonus?
The government will pay a bonus of 25% on top of whatever you save. This means that if you deposit the maximum amount of £4,000 in your LISA, the government will add a bonus of £1,000, and you’ll have £5,000 in the account in total.
The bonus is paid at the end of each tax year, and it is calculated based on your deposits (what you pay in), not on the interest.
The bonus will be paid every year until you reach 50 (up to a maximum of £32,000, if you opened your LISA when you were 18), and you will earn interest on both your savings and the bonus payments.
Who Is Eligible For A LISA?
To be eligible for a LISA, you must be aged between 18 and 40. As LISAs won’t be available until 6 April 2017, this means that you must have been born after 7 April 1977.
When Does It Start?
LISAs will be available from April 2017.
When Can I Take Out My Savings?
You can take out your savings at any time.
However, the government wants you to save for specific, long-term goals, and so you will only get the bonus if you are a first time buyer buying a house, or if you are 60.
If you withdraw your money in other circumstances, you won’t get the bonus, you won’t get any accrued interest, and there will be a 5% penalty fee chargeable on the amount you withdraw.
What Can I Use A LISA For?
The government has designed the LISA for two purposes:
1. Buying your first home
2. Retirement savings
If you are a first time buyer, you can use your LISA savings to buy a house costing up to £450,000. If the house costs more than this, you can still use your LISA savings, but you won’t get the bonus.
You must have had the LISA for at least 12 months before you make the purchase, and the money will be paid directly to your conveyancer or solicitor.
You cannot use the LISA savings for a buy-to-let property. When you withdraw the money for the purchase, the LISA will remain open so that you can then start saving for your retirement.
Most people will open a LISA to save for their retirement. Although you won’t get paid any more bonuses on deposits after you are 50, you can keep paying into the LISA and earning interest on the savings in the account.
Once you are 60, you can then withdraw the savings, including the bonuses, in full and without any penalties.
It is all tax free, and you don’t have to take out all the money at once: you can withdraw it in instalments as and when you need it.
Why Open A LISA?
The LISA is a semi-flexible, long-term savings option. If you are saving up a deposit to buy your first house, but it will take you a few years to do so, it’s a very attractive option.
Likewise, if you are self-employed and using the LISA as a pension, or want to top up your company or state pension, the LISA is a tax-efficient way to do it.
How can a LISA fit into your long-term financial plan? How much can you regularly afford to contribute? We’d love to hear from you!
Photo Credit: Stuart Miles @freedigitalphotos