The Lifetime ISA, or LISA, has not exactly been the most enthusiastically greeted investment product ever.
After it was introduced in 2017, financial providers didn’t exactly rush to add LISAs to their range of offerings, and British investors didn’t beat a path to their doors to demand them. In fact, it seems like the LISA has been largely ignored.
But that means turning our noses up at free money, which is surely a mistake, isn’t it?
A Lifetime ISA has an annual limit of £4,000, and that can go into cash or stocks, just like a standard ISA. The big attraction is that the government will top up your annual contributions with bonuses of 25%, so up to £1,000 per year. Too good to be true? There are some catches.
The intention behind a LISA is that the cash is used for one of two purposes — for saving towards a first time home purchase of up to £450,000, or for retirement.
So if you take money out for your home purchase, or for any purpose after you reach 60 (or in cases of early death or terminal illness), you’re fine. But if you take cash out for any other purpose at any other time, you’ll face a 25% penalty — that’s 25% off the total, which will eat into your original contribution as well as losing your bonus. And there are other rules…
Firstly, you can only open a LISA if you are over 18 and under 40, though you can carry on contributing beyond that and will receive annual bonuses on new money until you’re 50.
Oh, and the £4,000 limit is not additional to your standard ISA annual allowance of £20,000 — your total across all your ISAs must not exceed £20,000.
Why are LISA accounts being shunned? I suspect it’s because the government is over-complicating a simple thing.
The Individual Savings Account is surely a very good idea, though plenty of people are still unsure about the rules — and that has been compounded by several rule changes since introduction. And that’s the problem — such things need to be kept straighforward, but governments just can’t help meddling.
We now have a multitude of ISA types and ever-growing rule books. And to confuse things further, there’s also a Help To Buy ISA, which covers part of the same aim but has lower limits. It’s no wonder people are turning away in confusion.
Take the free cash
But surely snubbing 32 years of a free £1,000 gift per year is a mistake, isn’t it? Well, I don’t like the idea of mixing up house purchases and retirement, as they are very different things, and there can be downsides to both.
The house purchase option is only for first time buyers, so it’s no good to you if you already own a home. And that limit of £450,000 could be quite restricting in some parts of the country.
As for retirement, other options like a workplace pension might well be more profitable. And you might need your LISA cash before you reach 60 — so if you’re going to go for this use of a LISA, be sure that you have other investments to cover that possibility too.
But if you fit the rules, you could bag a very nice free cash gift by opening a Lifetime ISA.
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