Savings Advice Sussex – The Help-to-Buy ISA has departed, though you can still pay in if you already had one. But is the Lifetime ISA -or LISA as it is commonly known – really a good alternative for first-time house-buyers? You need to seek independent financial advice before investing.
At the beginning of December last year, the Help-to-Buy ISA was withdrawn for new investments. Its disappearance means that the LISA is now the only type of ISA that can offer incentives for those saving for their first home.
Anyone who had actually started a Help-to-Buy ISA before 1 December 2019 can continue to contribute up to £200 a month and has until 1 December 2030 to claim their Help-to-Buy bonus.
What is a LISA?
launched in April 2017, it is rather different from the ‘traditional’ Individual Savings Account (ISA):
- It can only be taken out by somebody aged between 18 and 39, with contributions payable up to age 50.
- The maximum investment is £4,000 each tax year (and remember, this is part of your £20,000 overall ISA limit, not in addition to it).
- There is a 25% government bonus payable on any contribution, meaning a maximum of £1,000 is added if the £4,000 annual limit is met.
- Withdrawals can be made penalty-free at any time after 12 months “if the proceeds are used to buy the investor’s first home and that home costs no more than £450,000.”
- Withdrawal is also penalty free from age 60 onwards.
- Any other withdrawals (other than on terminal illness) are subject to a penalty of 25% of the amount withdrawn.
The withdrawal penalty is a controversial feature because it claws back more than just the government bonus. A recent Freedom of Information request revealed that HMRC had collected over £9m in penalties from LISA encashments between April 2018 and November 2019.
When the LISA is not so lovely…
Steve saved £80 a month in a cash LISA for 18 months from April 2018, gaining a £20 government bonus on each contribution. In November 2019 he was forced to cash in his LISA after being made redundant. Low interest rates meant that the face value of his LISA savings was £1,832. However, there was a 25% (£458) penalty on encashment, which meant he received £1,374, which is £66 less than he had saved.
With the Help to Buy ISA (which had no penalties) gone, there is a risk that more young savers will end up paying LISA penalties.
It is a reminder that taking advice is a wise precaution, even for what look like simple savings plans.
Please get in touch if you would like a review of your ISA strategy or need more general tax, savings and investment planning help.
Please Note: The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.