CashNews.co
Millions of Brits under 40 could bolster their financial security by simply opening a Lifetime Individual Saving Account (LISA). Available to anyone aged between 18 and 39, LISAs are designed to help Brits save up to £4,000 a year towards buying their first home or for retirement.
The accounts can be opened with as little as £1, making them an attractive option for future larger investments. The standout feature of a LISA compared to a general savings account is the 25% bonus given by the government each tax year.
This means if you save the maximum £4,000, you’ll receive an extra £1,000 annually, which will continue to grow due to interest.
However, there are some caveats to investing in a LISA. If you plan to use the money towards a house, you’re limited to properties worth £450,000 or less.
If you can’t find a suitable property within this price range, you could face a predicament. A penalty is applied if you withdraw the cash for anything other than an ‘eligible’ home or retirement.
This penalty includes a 25% charge on the amount withdrawn, with the only exception being if the cash is withdrawn due to terminal illness with less than 12 months to live.
Moreover, should you pass away, any funds in the LISA, including government bonuses, will be transferred to your beneficiaries without any penalties.
Consumer advocate Martin Lewis has also highlighted the issue of the LISA penalty, as many young first-time buyers are being compelled to accept the penalty due to the inability to find a suitably priced property. In a letter addressed to the Chancellor earlier this year, he urged for a review of the £450,000 house price limit, which has remained unchanged since the introduction of LISAs in 2017.
He further proposed an amendment to the rules allowing first-time buyers to withdraw LISA funds for a deposit, excluding the government bonus contained in the account and without incurring a penalty.
Utilising a LISA for retirement
If you intend to use a LISA for retirement savings, you can withdraw funds from the age of 60. This is a significant advantage as it’s six years earlier than the current state pension eligibility age.
However, it’s crucial to evaluate whether your money would be better invested in a pension. Generally, due to the existing basic tax rates, if your annual income exceeds £50,271, investing in a standard pension may yield greater overall returns for your retirement.
On the other hand, work-based pension schemes offer an additional benefit over Lifetime ISAs (LISAs) as employers may match contributions. Furthermore, private pensions can be accessed from the age of 55.