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Is a lifetime ISA right for me?

17/03/2023

Saving towards your first house purchase or retirement can be tough, especially in today’s financial climate. Since April 2017, the Lifetime ISA has been around to help people to do just that. 

But is a Lifetime ISA right for you?

 

What is a Lifetime ISA?

Available to adults aged 18-39, a Lifetime ISA is a government-backed ISA that can help you save towards either your first property or retirement. Every tax year you can save up to £4,000 in your Lifetime ISA, and the government will pay in 25% of your contributions, meaning up to an extra £1,000 per year. This applies up to the age of 50.

You can withdraw the money in your Lifetime ISA for three different reasons: to purchase your first home, to use in retirement once you reach the age of 60, or if diagnosed as terminally ill with under 12 months to live. 

To use a Lifetime ISA for a house purchase you must be a first-time buyer.

There are two types of Lifetime ISA available: Cash Lifetime ISAs, where your contributions are held in cash, and Stocks and Shares Lifetime ISAs, where your contributions are invested in stocks, shares or funds. 

 

The pros and cons of Lifetime ISAs

By far the biggest benefit of a Lifetime ISA is the 25% tax-free contribution from the government, applicable to personal contributions of up to £4,000 per year. It gives first time buyers the chance to get on the property ladder – and couples can benefit from even greater contributions if they both take out a Lifetime ISA in their own name. 

If you have a Lifetime ISA you can still also pay into other ISA types, up to a maximum of £20,000 per year. If you have an Investment LISA and you want to improve its performance, you can also switch providers to try and get better returns or reduced fees and charges. 

However, there are also downsides to taking out a Lifetime ISA. Your money will be tied up until you buy your first house or reach the age of 60, unless you want to pay penalties for withdrawing it. Between 2021-2022, the total penalties paid by those withdrawing funds early reached £33m.

You can only pay into a Lifetime ISA between the ages of 18 and 39. Starting to pay in early could mean a number of years of government contributions, but is it the right choice for those at the older end of the age range? 

Stocks and shares LISAs come with their own risks – while the returns could potentially be higher if your investments perform well, the value can fall as well as rise. 

Finally, if using a Lifetime ISA to save for a first property, there is a £450,000 cap on the price of the property it can be used for. For those in more expensive areas, is this too low? 

Like any investment, a Lifetime ISA could well be the best option for some individuals – but all of the pros and cons should be taken into consideration before you decide.

 

“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”

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