A Lifetime of Saving

The lifetime individual savings account (LISA) was introduced in the UK in 2017 as a longterm investment for those between the ages of 18 and 39. The maximum annual subscription is £4,000 (which counts towards the annual ISA limit) and the government will add £1 for every £4 invested. Funds can be held as cash, stocks and shares or a combination of these. No further contributions to the LISA are possible after age 50, but the account will remain open and savings will still earn interest or investment returns.
A penalty-free withdrawal can only be made from a LISA if the saver is buying a first home, is aged 60 or over, or is terminally ill with less than 12 months to live. A LISA can therefore be used, with savings enhanced by government contributions, to save the deposit for a first home or for additional pension, but if withdrawals are made for any other reason, a 25% charge is made. This and other issues mean that savers should be aware of drawbacks as well as the benefits.

Withdrawal Charges

Because the government enhances the savings with a contribution of 25%, it is easy to think that the 25% penalty on withdrawal for non-qualifying purposes simply cancels this out. However, this is not the case.

For example, if a person saved £4,000, the government would add £1,000, making a total amount in the LISA of £5,000. But 25% of £5,000 is £1,250, meaning that as well as clawing back the government’s contribution, the saver potentially loses £250 (6.25% of their own money) from their original savings.
The limited flexibility of LISAs also means that a change of circumstances – such as needing to access savings in an emergency or indeed if the account holder never buys a home or requires funds before 60 – can mean penalties on withdrawal.

Property Problems

• LISA funds can only be used for a deposit for a property that costs no more than £450,000. In times of rising property prices, particularly in London, even first-time buyers may not find a suitable home. There are also other conditions that can cause difficulty for homebuyers:
• The property must be purchased at least 12 months after the first payment into the LISA.
•  A conveyancer or solicitor must act in the purchase as the LISA provider will pay the funds directly to them.
• A mortgage must be used and this cannot be a private mortgage from a spouse, civil partner or other specific relatives or their spouses or civil partners.

Pension Possibilities

If the LISA funds are not used for a property purchase, the saver might think that use as a pension is a fallback position; but remember that a standard pension allows for withdrawals from age
55 (57 from April 2028). Although LISA withdrawals are tax-free and a 25% bonus is paid, tax relief is given on pension contributions at the marginal rate and 25% can be taken as a tax-free lump sum.

Further, an employer could also contribute to an employee’s pension and there is a much higher threshold for normal pension contributions. Also, unlike other personal or workplace pension schemes, LISA savings will be relevant when calculating eligibility for universal credit or housing benefit.

Conclusion

The subject of LISAs has also been considered recently by the House of Commons Treasury Committee which, among other things, reported that the dual-purpose design of the LISA was complicated; the withdrawal charge meant holders risked losing a significant part of their savings due to withdrawals to cover unforeseen circumstances; and people might be diverted from saving in more efficient pensions. The aims of supporting first-time buyers and encouraging long-term retirement savings were valid, but LISAs may not be the most efficient use of taxpayers’ money to achieve those disparate objectives.

These issues and possible unexpected losses may mean that less financially literate savers may lose out and be put off using LISAs.

Practical Tip

Savers should seriously consider whether investing in a LISA will help them achieve their financial goals. As with all financial decisions, independent advice should be obtained.