Meet LISA, the Lifetime ISA

Posted on March 14, 2020

Introduced by George Osborne as part of the 2016 Budget, the Lifetime Individual Savings Account or LISA came into existence on 6th April 2017. This variant of the ISA aims to reduce financial pressures on younger people by helping them save for their first home and their retirement at the same time.

The LISA can hold cash, investments, or both…

No matter how many ISA accounts you already hold (we’ve listed the types of ISA here) you can still take out a LISA. Whilst payments made into a LISA account are part of your overall yearly ISA allowance (which is £20,000 for 2019/20), you can use a LISA to hold both cash and investments, so it is something of a hybrid (you can find out more about using a Stocks & Shares  ISA to shelter investments from tax here).

… and has the usual ISA tax advantages

As with other types of ISA, there is no Income Tax to pay on interest or other returns, and any increase in the cash value of the ISA’s contents will not be subject to Capital Gains Tax either.

Who qualifies?

LISAs can be started by people between the ages of 18 and 39.

A government bonus on your savings  or investments

A 25% government bonus will be awarded on deposits up to a maximum of £4,000 each tax year. At the end of the first year the bonus is awarded on the account balance at that time: thereafter, the 25% is awarded at the end of every month on the amount deposited during that month. The bonus is awarded every month until the account holder becomes 50 years old, at which time the account is locked.

If you were to take out a LISA at the age of 18 and pay in £4,000 each year, over the next 32 years you would deposit £128,000. The £32,000 government bonus awarded on that amount would see total deposits of £160,000. However it is possible to deposit more than £4,000 in a year, so long as the total amount remains within your ISA allowance.

£32,000 – up for grabs

The LISA therefore makes it possible to effectively be paid 25% interest monthly by the government on a deposit of £333 each month, on top of any interest paid over time by the LISA provider. Not only that, bonus awards from the government earn interest from the LISA provider, alongside your deposits.

Exactly how much interest you earn over time on your particular deposits and bonuses will depend on which provider you have your LISA with.

Income for your retirement

Once a LISA account holder is 60 years old they will be able to withdraw money from the LISA in a tax-efficient manner. However, if money is withdrawn before this time then not only is the government bonus lost (and also any interest earned on that part of the balance), but a 5% charge is due on the withdrawal.

Help with your first mortgage

There is a significant exception to the early withdrawal penalty: payments made towards securing a mortgage. There is therefore some overlap between the LISA and the Help To Buy ISA. If you hold both, you will have to choose which one you want to claim the government bonus on: it’s a single payment calculated on deposits made into one of the two accounts.

The bonus is per person, not per household

However, as with the Help To Buy ISA, if two people are buying a home together then they can pool their resources and each use either their LISA or Help to Buy bonus, therefore potentially doubling the government contribution towards their deposit.

Using a LISA for a mortgage: the rules

Various conditions apply when it comes to realising the government bonus for your new home:

  • you must be buying a residence;
  • you must take out a mortgage;
  • the property must be valued under £450,000;
  • you must have held your LISA for 12 months or more before the purchase takes place;
  • you must retain either a solicitor or conveyancer to act as your agent and complete the purchase (funds will be paid directly from your ISA provider to this agent).

Moving your LISA to another provider

In common with other types of ISA, whilst contributions to a LISA are part of an individual’s overall ISA allowance, moving to a different LISA (or transferring funds from another type of ISA) is not seen as a contribution and therefore does not count as part of that allowance.

In principle you are not locked into any one provider and can move your LISA pot where it will earn the best interest, but please note:

  • providers can and do apply restrictions on transfers; and
  • providers can and do charge transfer fees.

So (as with any type of ISA) be sure to ask questions and read the small print before you open the account, and weigh any fees alongside interest rates when looking to move your money.

The following rules apply to all LISA transfers:

  • you must complete an official transfer request to move your account;
  • if you withdraw money without a transfer approval, the withdrawal counts as part of your ISA allowance;
  • you can move all or part of previous years’ deposits;
  • you must move all or none of the current year’s deposits.

LISAs and Wills / Inheritance Tax

LISAs are treated the same as other ISAs when it comes to inheritances; that is, the contents are treated as part of the deceased’s estate and are not protected from IHT. However, the deceased’s spouse or civil partner does inherit a one-off additional ISA allowance equivalent to the cash value of the ISA either on the date of death or the date it was closed. Whatever the stipulations in the deceased’s will – even if none of contents of the LISA are left to the spouse – the allowance is theirs, and theirs only, automatically.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS, WHICH ARE SUBJECT TO CHANGE. THE TAX BENEFITS RELATING TO ISA INVESTMENTS MAY NOT BE MAINTAINED.

STOCKS & SHARES ISA INVESTMENTS DO NOT INCLUDE THE SAME SECURITY OF CAPITAL THAT IS AFFORDED WITH A CASH ISA. THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

No guarantee can be given that the information provided is accurate in the present or the future. It is not intended to constitute either a statement of applicable law or financial advice, and responsibility cannot be accepted for any subsequent loss following activity or inactivity by any individual or organisation. Indeed, such information should NOT be acted upon without first receiving appropriate and specific professional advice.