The LISA account, or Lifetime ISA as it is also known (I will be using these terms interchangeably throughout this post) , is still struggling to gain traction in the savings market. In tax year 17/18 there were only 166,000 LISA accounts opened, with currently only 3 providers offering Cash LISA accounts, though there is more choice when it comes to Stocks and Shares LISA accounts. In this post I’m going to explore why this product is particularly beneficial for 1st time house buyers, and, in my opinion, a Lifetime ISA should be a no-brainer for anyone who is serious about saving for their first home and is prepared to save diligently for that aim.
Free Money
With a 25 % bonus and a annual savings allowance of £ 4,000, the LISA account offers the opportunity to earn £ 1,000 in bonus’s each tax year. This is the government essentially giving you free money and a risk-free guaranteed return unrivalled in any other savings product. Compare this to instant access savings accounts, with the best interest rates returning between 1.4 – 1.5 %. Perhaps a better comparison is with fixed rate savings accounts, as with the withdrawal charge, you will lose the 25 % bonus on any withdrawn funds. Currently, 3 year fixed rate savings accounts are only offering around 2.4 % and 5 year fixed rate accounts offering around 2.5 %.
Hence saving £ 4,000 a year into a Lifetime ISA account, without withdrawing any of those funds, gives you an extra £ 3,000 when you come to buy your first home. Note, the Help to buy ISA’s bonus is locked at £ 3,000 and the Lifetime ISA has no bonus limit.
Bonus paid immediately
When you make a subscription to a Lifetime ISA account, your provider will claim the bonus on your behalf from HMRC and pay it into your LISA account within around 30 days. This means you will be accruing interest on the bonus in a Cash LISA and, in a Stocks and Shares LISA, the bonus will be available to be invested and potentially be earning you tax-free capital gains and dividend payments.
Consider that £ 4,000 invested in a Stocks and Shares LISA will be generating a £ 1,000 bonus, your original £ 4,000 investment will be earning dividends and potentially making capital gains, and your £ 1,000 bonus will also be invested earning further dividends and giving you further potential for capital gains. This point alone makes the LISA a must have for anyone with ambitions to own their first home.
Tax Free
This will be a factor for some, but not everyone: bear in mind, your annual personal savings allowance is £ 1,000 per year, your dividend allowance is £ 2,000 per year and capital gains allowance £ 12,000 per year. Hence most savers, particularly young people struggling to save for their first home, will not exceed these limits. Though, those with larger incomes and other investments will benefit from the LISA account’s tax-free wrapper.
Better than the Help to Buy ISA
The Help to buy ISA is a similar product, but, in my humble opinion, the LISA is a far better option for those people who are prepared to save diligently and have no intention of withdrawing any of their LISA account subscriptions before buying their first home.
The Help to buy ISA also closes to new investors from December 1st, 2019. Hence this will cease to be an option fairly soon. I compare the Help to buy IA and Lifetime in another post, click here to see.
Can be Used for your House Deposit
When your Conveyancer feels you will be ready to complete your first house purchase within 90 days (an extension can be requested, if it drags on), then he will request a withdrawal from your LISA account to be paid directly to him. This will mean that you will likely to be able to utilise your LISA savings and accrued bonus’s for the deposit. This was never an option with the Help to buy ISA, which only paid the bonus on completion.
Saving for Retirement
The dual nature of the Lifetime ISA means that it can also be used a supplement (but not replacement) to your pension. You can save into a LISA until you turn 50 years old and then withdraw all funds, including accrued bonus’s without penalty at 60 years old.
After buying your 1st home, you could choose to leave a small balance in your LISA account and hence keep it open. Then continue saving and earning government bonus’s until you turn 50 years old. As I mention above, you will need to then wait another 10 years before you can withdraw any further funds without losing your 25 % bonus. This may not be attractive to everyone, but it is another string in the LISA account’s bow and, I’m sure, will be of interest to many people.
Conclusion
I’m not completely convinced of the LISA as a pension supplement for your retirement, but as a way of saving for your first home, there is no better option currently available. I say this even while you still have the potential to open a Help to buy ISA account.
The only real negative with the LISA account is it’s penalty charge. But, if you are prepared to save diligently and foresee no reason to make withdrawals from your Lifetime ISA before buying your first home, then there is no better guaranteed return.