The Lifetime ISA has been touted as a way to give under-40s the chance to either save for their first home or their retirement, with it being seen as a valuable long-term savings vehicle to move people away from short-term thinking. Will you be taking advantage?
Let's start by looking at what a Lifetime ISA actually is. It's a new kind of ISA that's set to launch in April 2017, and will be available to those aged 18-40 who want to save up to £4,000 per year. As an added incentive, they'll receive a 25% top-up from the Government – for every £4 saved, they'll receive a Government bonus of £1, which could add up to a maximum bonus of £1,000 every year.
While it can only be opened by those under 40, once opened the saver can pay in until they're 50 years old, but the money has to be used towards a first house deposit or pension. In the case of the latter, the money must be held in the ISA until the saver is at least 60, and withdrawals for any other reason (bar exceptions such as terminal illness) will face a 25% penalty charge (20% to recover the bonus and an extra 5% charge). You can find out more about it – and whether you could benefit – here.
The big question now is whether you'll actually make use of such a savings vehicle, and according to research, a number of people would consider it.
A survey from Hymans Robertson found that 61% of workers under the age of 40 would consider opening a LISA, and 23% plan to do so as soon as the accounts are available. Appetite for them appears to be even greater in London, with 72% of respondents in the capital saying they'd open a LISA and 37% planning to do so straight away, perhaps reflecting the difficulty in being able to afford a property in London.
On the face of it, the benefits are clear. Indeed, the Government bonus was cited as the main attraction of the LISA (57%), followed by the flexibility of being able to use the savings towards a first home rather than having to keep it tied up (36%). Most wouldn't use it to replace their pension, either – as had been feared by many in the industry – with 68% saying that they'd save into a LISA as well as a pension, and just 18% planning to redirect all their retirement savings into this vehicle.
However, there are some potential issues that mean not everyone is so excited about the prospect of the LISA. Those who wouldn't consider opening one cited the early exit penalty (41%) as a key reason, followed by the fact that they preferred to save through a pension to take advantage of employer contributions (34%), both of which are vital to consider.
The Lifetime ISA will only really be suitable for those who either want to buy their first home or are confident they won't need to access their funds until retirement. The early exit penalty means that, should you need to withdraw your funds early, you may actually lose out – investing the full £4,000 in the first year would result in a bonus of £1,000 to bring your pot to £5,000, but if you had to withdraw the funds for anything other than a house deposit you'd be charged 25% of that, which would bring it back down to £3,750.
It's also important to not use the account as an alternative to a workplace pension – doing so means you'll miss out on valuable employer contributions and Government tax relief, which can often work out as far more lucrative than the Government bonus on LISA savings.
However, if you're confident you'll be using the funds for a first home or retirement – and that you'll use it as an additional long-term savings vehicle rather than an alternative to a pension – there's no reason why a LISA can't be beneficial. It's all about finding a savings solution that works for you, so it could be worth keeping a lookout in April to see if there's an account that meets your needs.
Don't want to wait until April to start saving for a first home? Check out the Help to Buy ISA, another account that comes with a Government bonus.
If you don't meet the criteria for either, keep it simple and opt for a cash ISA instead (or a stocks & shares ISA if you've got a slightly higher risk appetite).
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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