Lifetime Individual Savings Account (LISA) - What is a Lifetime Individual Savings Account?
A Lifetime Individual Savings Account (LISA) is a new type of Individual Savings Account (ISA) that can be used to help save for a home, retirement, or both - with a bonus of up to £1000 per year from the government until you reach the age of 50.
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The originally mentioned rollout was in the chancellor's budget statement during April 2017. The announcement, however, fell rather flat, and since then the scheme seems to have passed by the majority of people.
The initiative was launched to try and combat the issue of those under 40 struggling to balance saving for retirement, whilst also attempting to save for a deposit for a property- which today is no easy feat.
What are the rules for opening a Lifetime Individual Savings Account?
In practice, the conditions of the Lifetime Individual Savings Account are pretty straightforward and are outlined below. When opening a LISA, you:
- Must be aged between 18 and 40
- Can put a maximum of £4,000 per year into it
- If you've reached the maximum of £4,000 for the year the government will add a £1,000 bonus (25%), upon which interest can also be earned.
- If you save less than £4000, the government will match the amount with a proportional bonus.
- The bonus is paid each year up until you turn 50
- A LISA can be made up of cash, stocks, or a combination, depending on what you need it for.
How does using a LISA for property or retirement work?
How you want to use the Lifetime Individual Savings Account is entirely up to you (obviously). We will cover the two use cases in turn, exploring how each works.
Using a LISA to buy property (or to use for a deposit)
If you're looking to buy a property in the future, then it's likely that the LISA itself will be cash-based, purely because the funds need to be liquid so you can move quickly and put down a deposit.
If you are planning to use the savings for a deposit, then whatever you've saved once the account has been open for a period of 12 months or more can be used for that purpose. If your partner also has a LISA, you can still combine them, meaning that you get two sets of government bonus.
There are some conditions to note:
- The property you are buying must be no higher in value than £450,000, and must have a mortgage.
- The LISA cannot be used to purchase a buy-to-let property (and therefore cannot be rented out).
- If your partner also has a LISA and you are receiving two sets of bonus, the £450,000 property limit remains in place and does not increase to a value of up to £900,000.
Once you've used the savings to buy a property, you can keep the account open and continue contributing to it. When you do, government bonuses will still be paid until you are 50, so you can use this amount for our next scenario:
Using a LISA for retirement
Saving for retirement is a marathon, not a sprint- so we need to take a longer view on this one. Like mentioned before, it's possible for the LISA to be made up of cash or stocks (or a combination). Depending on how comfortable you are with risk will determine whether you fancy investing the money in stocks and shares, or whether you'd prefer to just take the cash.
If you're purely focused on using this account for retirement (or even if you do plan on using it for both a deposit and later on for retirement), it's always worthwhile to check out your options to see what would best suit you. Remember, for retirement you'll have this account into your 70's and beyond when it comes time to start withdrawing from it.
After your 60th birthday, you can withdraw all savings tax-free to be used for retirement.
Lifetime Individual Savings Account: An Example
The best case scenario would look something like this:
- You open a LISA at the age of 18.
- You make the maximum contribution of £4,000 per year until you turn 50.
- These contributions (plus the 25% bonus), would mean end up with £160,000 (£32,000 of bonuses).
However, managing this would be quite a large task, so if we took a more reasonable £150 a month, then the scenario would look like this:
- You contribute £150 a month (a total of £1,800 per year)
- The government would then match this with 25%, meaning you'd end up with a total of £2,250 for the year.
- Assuming you contribute £150 every month, by the time you reach 50 you'd have a total value of £72,000.
Are there any downsides to the Lifetime Individual Savings Account?
Now that I've spent plenty on extolling the virtues of a Lifetime Individual Savings Account, it's a good time to address some downsides. These downsides are inherent to Individual Savings Accounts in general, but of course, we will be specifically addressing the LISA.
We've touched on a few of them above (as part of the conditions relating to purchasing a property or using the funds for a deposit), but what we haven't covered are the penalties associated for withdrawing funds early:
- If you do not wait until you are 60 to withdraw for retirement uses, and you do not put it towards a property, then there is a charge of 25% of the total amount you withdraw (any government bonus, plus a penalty of 5%).
This withdrawal charge does not apply if you cash out any funds during the first 12 months the account is open and no penalties are levied if you are terminally ill and need to cash out the funds.
Savings, expenses, and Debitoor
The decision to become a freelancer or run a small business means that you miss out on things such as an employer contributed match to your pension and the like. Because of this, you'll have to handle things like a retirement pot on your own- either through plain savings, or through a private pension plan.
Although we've talked at length about what the LISA can be used for, it's always important to remember that the conditions of the scheme are subject to change, so it would be wise to look into a proper pension plan and contribute as much as you can towards retirement.
You can use Debitoor's expenses overview and profit and loss report to see the bigger picture of your business with how you're doing. This way, you can always be sure you're on track and that your business has a healthy turnover, meaning you can put something aside to contribute towards retirement in any form you wish.