An important Lifetime ISA (LISA) change you may have missed

The Lifetime ISA (or LISA) was introduced in April 2017, and its main purpose was to supersede the Help to Buy ISA. In normal circumstances, withdrawals are only permitted when you’re using the funds to buy a first home, but once you reach age 60, the account can also be used as a source of retirement income.

How does the LISA work?

It works by allowing savers to receive a 25% government bonus on all contributions. As far as financial incentives to save from the government go, this arrangement is rivalled only by the pension (though there are strings attached: read on).

Robertson Baxter financial adviser Gillian Shirt says: ‘LISAs are a really good way of saving for your first property. You have the freedom to decide whether you want to contribute a lump sum or budget with regular savings. If you are saving for a home anyway, by using a LISA you could grow your funds much faster and get your first home sooner’.

It’s not just first-time buyers who can benefit either. For adults under 40 who are already putting the maximum permitted into a pension, a LISA can offer a very good additional retirement savings pot. Not only do you receive the government top up (which is similar to the basic-rate tax relief credited to pension savers) but, unlike in a pension, any income you take from a LISA at age 60+ will be free from tax.

The annual LISA subscription limit is £4,000 per year, though this forms part of the overall adult ISA allowance of £20,000 a year. To open one, you have to be under 40, and you can contribute until the age of 50.

What’s the catch?

A key issue to remember when it comes to saving via a LISA is the withdrawal penalty. Taking out funds for an unauthorised purpose would normally give rise to a withdrawal penalty of 25%. This sounds like you are just losing the government bonus, but it is worse than that.

Say you put in £100, and the government tops it up to £125. If you withdraw this money without a valid reason, the penalty will be £125 x 25% = £31.25, leaving you with £93.75, i.e. £6.25 less than you originally put in. On a fund value of £1000s, this exit penalty can become very costly.

What is the recent change to the LISA rules?

Since various measures were put in place to support businesses and individuals through the coronavirus crisis, the government has decided to reduce the LISA exit charge to 20%. In effect, this now means that you lose the government bonus upon withdrawal and nothing more.

This step was taken because the government didn’t want savers to be penalised for needing to tap into their LISA funds during a difficult period.

Do LISA savers need to do anything?

While most may be content to keep their LISA savings where they are, it’s worth knowing that the option to withdraw is there if needed. Likewise, if you have children, nieces, nephews or grandchildren who own a LISA, this information could be helpful for them.

The government has confirmed that the reduced penalty will be in place until the end of the tax year, i.e. the 5th April 2021. However, if you do decide to make a withdrawal (or if you are informing others about the new rule), be sure to check beforehand whether the lower charge is still in force on the government website.

Want to know more? Let’s have a conversation

If you would like more information or are considering opening a LISA, either for yourself or a younger family member, one of our advisers would be glad to have a conversation – just give us a call or send us a message.

Please note: Certain types of LISA can be used to invest in stocks and shares. If you choose to invest in a stocks and shares LISA, please be aware that the fund value can fall as well as rise, and you may get back less than you put in. Cash LISAs are available for savers who do not want their funds to go down in value.

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