18 min Read
20 Apr 2017

Written by Damien

Damien is one of the most widely quoted money and investment experts in the national press and has made numerous radio & TV appearances. He created MoneytotheMasses.com while working in the City when he became disillusioned with the way the public were left to fend for themselves because they could not afford financial advice.

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Lifetime ISAs explained – are they the best way to save?

Lifetime ISA explained - are they any good

Lifetime ISA explained - are they any good

What is a Lifetime ISA and how does it work?

  • A Lifetime ISA (also known as a LISA) is a long term tax-free saving account that gives the saver a Government bonus of 25% of the money they put in up to the annual Lifetime ISA contribution limit
  • Lifetime ISAs were announced in the March 2016 Budget and are designed to help first-time buyers saving for a deposit and also help those looking to save for retirement
  • Lifetime ISAs will be available from 6th April 2017 although there are only a handful of Lifetime ISA providers who plan to offer the Lifetime ISA accounts initially. We detail the full list of Lifetime ISA providers later in article
  • Lifetime ISA rules require the applicant to be aged 18 or over, under 40 years of age on 6th April 2017 and resident in the UK
  • An individual can save up to £4,000 per year in a Lifetime ISA which forms part of the overall ISA allowance of £20,000 (2017/18 tax year). That means you can have a Lifetime ISA alongside a normal Stocks and Shares ISA, cash ISA or innovative finance ISA. The only caveat is that you have to keep the total contribution below the annual ISA allowance which is £20,000 for the 2017/18 tax year.
  • Contributions into a Lifetime ISA will qualify for the 25% bonus until the saver reaches the age of 50 but the account can still remain open beyond that age. The youngest age at which you can have a Lifetime ISA is 18.
  • The government bonus for Lifetime ISAs will be 25% of the amount invested only and will not include any interest earned or growth on stocks and shares investments. So if you pay £4,000 into a Lifetime ISA (LISA) in a given tax year this will be bumped up to £5,000. The maximum amount of Lifetime ISA bonus an individual can get is £32,000 (assuming they saved the maximum amount into a LISA from the age of 18 to age 50)
  • A couple could open separate Lifetime ISA accounts, as long as they were both eligible, and save a total of £8,000 into Lifetime ISAs between them each tax year and get a total bonus of £2,000. That takes their total LISA contribution for a tax year to £10,000.
  • The government bonus will be paid annually in the tax year 2017/18 and then monthly from April 2018 and once the bonus is paid it will gain interest or investment growth as if it was the investor's own money

Investment Lifetime ISAs (Stocks and Shares Lifetime ISAs)

  • Lifetime ISA contributions can be invested in a range of investments such as stock & shares and investment funds. This is known as a Stocks and Share Lifetime ISA or Stocks and Shares LISA
  • It is important to note that an investment Lifetime ISA carries more risk than just holding your contributions in cash as your investments can do down as well as up and, therefore, should be held for a minimum of 5 years
  • If you are looking to use a Lifetime ISA to buy a house a in 2 or 3 years then a cash Lifetime ISA may be the best option as the interest earned is guaranteed. On the other hand, if you are looking to use a Lifetime ISA to save for retirement then an investment Lifetime ISA would probably be better as you could benefit from the potentially better return over a longer period (stocks and shares tend to outperform cash over the long term).

Cash Lifetime ISAs

  • Contributions into a Lifetime ISA can be held in cash and will earn interest just like a normal savings account but with the added benefit of being tax-free and qualifying for the government 25% bonus
  • Don't forget to make sure you are getting the best interest rate available on your contributions by shopping around, don't forget you can move a Lifetime ISA from one provider to another to improve the interest rate earned

Lifetime ISA withdrawals

Lifetime ISA withdrawals are free if you are:

  1. using the proceeds towards buying a first home
  2. aged 60
  3. terminally ill with less than 12 months to live
  4. transferring a Lifetime ISA to another provider

If you want to withdraw your investment for any other reason then you will have to pay a penalty of 25% of the amount withdrawn. This is the main disadvantage of a Lifetime ISA. The penalty could mean that you get back less than you paid in.

What can a Lifetime ISA be used for?

Property purchase

  • A Lifetime ISA can be used by a first-time buyer towards purchasing a property which can be at any time once the account has been held for 12 months. So if you want to buy a house in less than 12 months time a LISA is not for you
  • Any property purchased must be valued at £450,000 or less and must be the first property owned, wholly or in part, by the applicant. While the property value limit seems high it may restrict those buying a property in London due to the inflated property market there
  • The money saved in a Lifetime ISA will be paid directly to the conveyancer/solicitor not directly to the investor
  • The property purchase must complete within 90 days from the withdrawal but if the property doesn't complete it can be transferred back into the Lifetime ISA with no loss of bonus
  • The Lifetime ISA is designed to help first-time buyers get on the property ladder so all purchases must be made with a mortgage or the 25% bonus will be sacrificed

Retirement

  • A Lifetime ISA can be used to fund retirement once the applicant reaches the age of 60
  • At age 60 all or part of the investment can be withdrawn with any remaining investment left to continue growing
  • All proceeds are tax-free, unlike a pension, but could affect eligibility for some means tested benefits

Who can have a Lifetime ISA?

  • Anyone over the age of 18 but under the age of 40 on 6th April 2017
  • A Lifetime ISA is a personal product so a husband and wife or partners can have their own ISA. So a couple can have more than one Lifetime ISA
  • Only one Lifetime ISA can be held in any tax year
  • Opening a Lifetime ISA will be simple and paying into a Lifetime ISA can be done with regular contributions made from a bank account
  • Parents and grandparents can pay into a Lifetime ISA opened by their child or grandchild

List of Lifetime ISA providers

Below is a full list of Lifetime ISA providers including Stocks and Shares Lifetime ISAs and Cash Lifetime ISAs.

Lifetime Stocks and Shares ISA provider Lifetime cash ISA provider Plan to launch a Lifetime ISA No confirmed LISA plans
Hargreaves Lansdown Skipton Building Society (from June 2017) AJ Bell Halifax
Nutmeg Scottish Friendly Barclays
The Share Centre Wealthify Natwest
Fidelity Nationwide
Bestinvest HSBC
Santander
Moneyfarm
Lloyds
First Direct
Bank of Scotland
Zurich
  • Lifetime ISAs are a new product launched in April 2017 so new providers are still deciding whether to offer this product to the public
  • Hargreaves Lansdown, the UK's number 1 investment platform has announced, that they will have a Lifetime ISA available from 6th April 2017. Hargreaves Lansdown also provide a handy Lifetime ISA guide and calculator which will work out your potential bonus for you
  • The only other confirmed Stocks and Shares Lifetime ISA providers are Nutmeg and The Share Centre
  • Skipton Building Society has announced plans to provide a cash LISA in the summer of 2017

Cheapest Lifetime ISA

At present the choice is between just three Lifetime ISA providers. Hargreaves Lansdown is the the cheapest Lifetime ISA if you want to manage your own investments, with an annual management charge (on top of any fund charges) of 0.45%. Hargreaves Lansdown offer the best investment fund choice and negotiate fund charge discounts on a range of funds.

By contrast Nutmeg offer either a fully managed service where they run a portfolio for you with an annual charge of 0.75%. On top of this there is typically an additional charge of 0.19% to cover the cost of the underlying investments they buy and sell for you. A cheaper alternative is on offer if you want a fixed allocation portfolio which means that Nutmeg don't make investment decisions on your behalf and leave your investment alone once you've chosen a portfolio at outset. This reduces the cost to 0.45% but again you still have to pay for the cost of the underlying investments (circa 0.19%).

Finally The Share Centre offer just three funds (cautious, positive and adventurous) to invest in with a total all-in cost of 2%.

Best Lifetime ISA

At present the range of Lifetime ISAs on offer is incredibly limited but the best value for money when it comes to charges and investment options is the Hargreaves Lansdown Lifetime ISA. If you want someone to manage your LISA for you then the Nutmeg Lifetime ISA (fully managed option) is the only real choice.

Are Lifetime ISAs worth it?

Lifetime ISA Pros

  • The government bonus of 25% is very generous and will boost any savings made which is obviously attractive
  • All proceeds from a Lifetime ISA are tax-free
  • Easy to open with low minimum contributions
  • Savings in a Lifetime ISA can be held in cash or invested in a range of products through an investment platform
  • If investing to finance retirement then all withdrawals will be tax-free whereas pension income is taxed at the recipient's marginal rate, however, I have reservations about the suitability of the a LISA for retirement saving (see below)

Lifetime ISA Cons

  • Proceeds from a Lifetime ISA have to be used for house purchase or left invested until age 60 or the 25% exit charge will apply
  • There may be better ways to save for retirement such as a pension provided by an employer where contributions may be matched by the employer
  • For higher rate tax payers it may be more beneficial to invest in a pension as they will receive 40% tax relief on their contributions
  • Benefits from a pension can be taken from age 55 compared but only from age 60 for a Lifetime ISA
  • Lifetime ISAs are subject to the whim of future governments and may be altered or withdrawn at any time

Lifetime ISA vs Help to Buy

  • The Help to Buy ISA was launched in December 2015 and just like a Lifetime ISA the government add a 25% bonus to any investment
  • Whilst an investor can have a Help to Buy ISA and a Lifetime ISA at the same time only the bonus on one of them will be available to buy a property
  • Investment in a Help to Buy ISA is limited to £2,400 each year, investment in a Lifetime ISA is limited to £4,000 each year. The other big difference is that you can only make monthly contributions (maximum of £200) to a Help to Buy ISA and not lump sum payments. There's no such restriction on Lifetime ISAs
  • Help to Buy ISAs can only be held in cash with no facility to invest in other investments such as stock and shares or investment funds
  • The maximum property purchase price allowed in a Lifetime ISA is £450,000 whereas a Help to Buy property purchase price is limited to £250,000 (£450,000 in London)
  • A Help to Buy ISA can be opened from the age of 16 with no upper age limit
  • If someone already has a Help to Buy ISA, and over the age of 18, they can transfer their investment into a Lifetime ISA and will be able to invest up to £4,000 every year and purchase a property up to a £450,000 purchase price
  • Overall a Lifetime ISA is marginally the better product

Lifetime ISA vs Pension

Lifetime ISA

  • Investment capped at £4,000 a year
  • Government bonus of 25% of contributions in any tax year
  • Contributions are made from post tax income
  • Investment can withdrawn from age 60 without loss of government bonus
  • Withdrawals are tax-free after age 60
  • Has to be started before the age of 40
  • Investment liable to inheritance tax
  • Can affect certain benefits
  • Can be used to pay creditors in the event of bankruptcy

Pension

  • Investment capped at £40,000 a year
  • investment can be withdrawn from age 55
  • Contributions are made from pre-tax income which is equivalent to a bonus of 40% to a higher rate tax payer
  • Withdrawals are liable to income tax at the recipients marginal rate
  • Often can be increased by employer contributions
  • Can be started for a child by their parent from birth
  • Not liable to inheritance tax
  • Does not a affect benefits
  • Cannot be used to pay creditors in the event of bankruptcy

Should I have a Lifetime ISA or a pension?

The Lifetime ISA was born out of an idea to create a pension-like ISA product. What we actually ended up with was a halfway measure. If you are saving for retirement then a pension, especially one which an employer contributes into as well, would be better. Not only can you contribute more into a pension but you also receive tax relief on the way in. In addition there are no inheritance tax issues plus you can withdraw all of the money once you are age 55 without penalty. Of course there are tax implications on withdrawal from a pension however these can be mitigated by ensuring you have no other taxable income at the point of accessing your pension.

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