More than half a million Britons have opened a Lifetime Individual Savings Account (LISA), introduced in April 2017 to help young people save for retirement and buy their first home.
While LISA holders are currently too young to make retirement withdrawals, the financial services company Hargreaves Lansdown (HL.L) said it saw 5,258 customers make a home purchase withdrawal from their LISA.
The average age of its LISA holders is 31, the same as the average age of a first-time buyer.
“It seems that a good number have opened a LISA for retirement. This is particularly useful for the self-employed, who are not currently covered by automatic enrollment and are therefore less likely to have a pension – for this group LISA can play a vital role in their retirement planning.” said Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown.
How does Lisa work?
People between the ages of 18 and 40 can contribute up to £4,000 ($5,421) to their LISA each tax year and in return they get a 25% bonus. They can withdraw tax-free money to buy their first home anytime after the first year.
They can also contribute to their LISA until the age of 50 and withdraw money from it tax-free without paying any penalty from the age of 60. Contributions to LISA are part of their annual £20,000 ISA allowance, so if they have to keep track of how much they’ve put into others, they could face a tax burden.
LISAs are tax efficient – savers won’t pay tax on savings that exceed their personal allowance and if they have LISA stocks and shares, they don’t have to worry about paying dividends or l capital gains tax.
What’s the catch?
The purpose of a LISA is to help people save for their first home or for their retirement. If they withdraw money for any other reason, they will incur a 25% penalty and could actually end up eating away at their savings.
Last year, the government temporarily reduced the LISA penalty to 20% in response to the pandemic. Despite this, £34million was paid in penalties last year, more than three times the amount paid the previous year.
HL customer data shows that 8,221 customers paid a penalty to opt out.
The government has since reinstated the 25% penalty.
“We are calling on the government to consider reinstating the 20% penalty it introduced between March 6, 2020 and April 5, 2021, so this does not happen,” Morrissey said.
There is also a penalty for buying a house worth more than £450,000, which can be difficult, especially for those in London.
Read more: ISAs remain the super stars of UK tax saving options
Who benefits from using a LISA?
Having a LISA and benefiting from the government supplement can really boost home deposit savings and even if someone is already contributing to a pension, a LISA can be a good alternative vehicle to supplement retirement planning.
The self-employed may find them particularly advantageous as they do not benefit from self-affiliation where they automatically contribute to a pension and receive a top-up from their employer.
It can also play a vital role for employees. The impact of the 25% bonus on a LISA is the same as the base rate relief on a pension, and all earnings are tax exempt.
This means that anyone who is currently a base rate taxpayer and expects to be one in retirement, who has already benefited as much as possible from employer contributions through their employer pension, could use a LISA for the next installment of his retirement savings. – assuming they are of the correct age to qualify.
Even if you can’t open a TFSA after age 39 or contribute to it after age 50, contributions made will continue to benefit from investment growth.
it’s worth opening a LISA with a minimum amount so you can keep your options open in the future, Hargreaves Landdown said, “even if you don’t see how it would work in your situation.”
Read more: Money: 22 retirement tips for 2022
How is it different from a purchase assistance ISA?
LISAs and Purchase Assistance ISAs were designed to help people get on the property ladder. Help to Buy ISAs closed to new applicants in November 2019, but they already have one that you can continue to register until November 30, 2029.
Both products attract a 25% government bonus, but while the maximum contribution to a LISA is £4,000, for an ISA purchase aid (after the first year) it is £2,400 – and it must be paid monthly.
And while ISA purchase assistance is only for cash savings, Brits can choose between a cash LISA or a stock and share LISA.
In addition, purchase aid covers first homes worth up to £450,000 in London but £250,000 elsewhere.
Some of the most popular funds bought for LISAs in 2021 Fundsmith Equity, JPMorgan (JPM) Emerging Markets and Marlborough UK Micro-Cap Growth.
The most popular stocks bought for LISAs in 2021 include Apple (AAPL), Cineworld (CINE.L), Coinbase (COIN), Gamestop (GME), International Consolidated Airlines (IAG.L) and Tesla (TSLA)