A client contacted me recently with questions about his daughter’s Lifetime ISAs (LISAs), which has inspired me to write this post. His daughter has saved into two LISAs and has a Help To Buy ISA but, with her first property purchase coming up, they didn’t know the best way to deal with them.
The Basics
Let’s start with some basic information about LISAs and Help to Buy ISAs:
- They are both intended to help first-time buyers save for a home. LISAs have the additional purpose of also being used towards saving for retirement.
- Help to Buy ISAs are no longer available, but anyone who has them can continue to pay into one; the maximum is £200 a month. When the account holder purchases their first property HMRC provides a bonus of 25% (to a maximum of £3,000. In other words a savings balance of £12,000).
- LISAs, replaced Help to Buy ISAs and are available to anyone aged between 18 and 40.
- The LISA maximum annual contribution is £4,000 with a 25% bonus added by HMRC once the contribution is made. E.g., You pay in the £4,000 annual allowance and £1,000 will get added on your behalf. Contributions can be made monthly, annual or on an ad-hoc basis.
- Although a new LISA isn’t available to anyone 40 or older, existing LISA owners can continue to pay into them until 50. This means, unless the rules change (which is entirely possible), anyone investing the maximum every year could accrue, ignoring investment growth or interest, a total of £160,000 inclusive of the Government bonus.
- Because LISAs are intended to be a retirement savings product in addition to a first-time buyer savings vehicle, they are also available tax-free after age 60.
- There are two different types of LISA; a Cash LISA and an investment LISA. If the intention is to purchase a home in the near term (typically within a few years), investing in an investment LISA may lead to short-term stock market losses that can’t be recouped in time. On the other hand, if you are saving for the long-term, using a Cash LISA only would lead you to miss out on higher, above inflation, returns.
Property Purchase Rules:
There are specific rules about the property purchase:
- For the Help 2 Buy ISA the property must be a first-time buyer, living in the UK who is 16 or older. The property must not be valued at more than £250,000, or £450,000 in London and it is to be the intended home, not an investment property. It must also be bought with a mortgage, not in full with cash.
- For the LISA, the property rules are the same as with the Help to Buy ISA, with the exception that the value of the property can be up to £450,000 wherever you intend to live, not just for London homes.
- If you have both Help 2 Buy ISAs and LISAs, the bonus will only apply to one of them. So you will need to think about the order in which you do things.
- Multiple LISAs can be used to purchase a property without the loss of the bonus.
Withdrawals
- Help to Buy ISAs can be withdrawn tax-free at any point, but doing so will forgo the loss of the government bonus at the point of property purchase. If the intention is to use the balance to purchase a property it is therefore vital that the account is paid to the conveyancing solicitor. The conveyancer will claim the bonus from HMRC. This should ideally be done once the offer has been accepted.
- If the sale falls through, it should be possible to restore the Help to Buy ISA.
- A LISA can be accessed at any time, but if it is other than for their two intended purposes, or if the account holder is terminally ill, it will result in a 25% penalty. Notably, this penalty isn’t just the return of the bonus, but 25% of the amount withdrawn. So, potentially a big hit to take if the total is withdrawn.
Timing to Get The LISA Bonus
A LISA needs to be open for 12 months for the bonus to qualify and can take 4-10 weeks for to be requested from HMRC and applied to the account. So, you need to give yourself time to pay into a LISA and receive the bonus before you need to use the fund to purchase a property.
If you intend to buy a property in the future but can’t yet afford to put a meaningful contribution in, you can always pay a small amount to start the twelve-month clock. Then, when you have more money to save into the LISA you can add it without having to wait 12 months to get the bonus. This can help avoid missing out on the bonus if a property purchase is progressing.
Transfers & Interaction with Other ISAs
- It is possible to have multiple LISAs, but only one can be opened in any tax year.
- Help to Buy ISAs and existing LISAs can be transferred to another LISA, so keep an eye on interest rates to make sure you are getting the best deal.
- One of each type of ISA can be opened each year, but following the 2023 Autumn Statement it will be possible to open multiple types of the same ISA in a single tax year (but still only one LISA per tax year).
- Any contribution falls within the total £20,000 overall annual limit for any ISA.
- If a child has a Junior ISA, to benefit from the 25% government top-up bonus, it is possible from age 18 to withdraw £4,000 tax-free a year and save into a LISA.
LISAs or Pensions?
If LISAs are also for retirement and you get a 25% bonus, what about a pension? Which is more appropriate?
The answer to this is it depends upon your situation but there are several considerations:
- Pension contributions benefit from a 20% HMRC top-up, known as ‘tax-relief’ which is applied by the pension provider. For example, an £80, contribution is ‘grossed up’ by 20% to £100. And, if you do the maths, you will notice that a £4,000 pension contribution is grossed up by 20% to £5,000; the same as with the LISA.
- The important difference is how much you can pay into each. The limit of a LISA contribution is only £4,000, but the pension annual allowance is much higher; the lower of 100% of earnings or £60,000, with the possibility of ‘carrying-forward’ unused allowances from previous years.
- Additionally, higher-rate taxpayers can claim back the additional 20% tax on pension contributions. This means to get £5,000 into a pension it only costs the pension saver £3,000; £1,000 in tax relief applied and £1,000 in reclaimed higher rate tax relief.
- Accessibility is also a consideration. The LISA is available from 60 without penalty when used for retirement savings, but can be accessed at any time if needed. Pensions are currently only accessible from age 55 (rising to age 57 in 2028) but without penalty at that time.
- Only 25% of a pension is available as a tax-free lump sum, whereas a LISA is available entirely tax-free when accessed from 60. But, the actual monetary value of the tax-free lump sum is likely to be higher assuming higher contributions throughout the term.
- If your choice is a LISA or a pension and you are employed, by being auto-enrolled into your company pension you receive employer contributions too.
- Pensions also don’t form part of your estate for inheritance tax purposes, but a LISA (and any form of ISA) does.
- If you are required to declare yourself bankrupt pensions are protected but LISAs would most likely have to be cashed in (with the penalty).
- The value of any LISAs would also affect access to means-tested State benefits. Pensions, on the other hand, don’t.
Photo by Sandy Millar on Unsplash
