A warning has been issued to five groups of people who need to take out a Lifetime ISA now. The Lifetime ISA has been championed by personal finance experts as the Labour Party government and Treasury launch a consultation over whether to reform the Lisa.
Laura Suter, director of personal finance at AJ Bell, said: “There’s no denying that the account is more complicated to explain than a standard ISA, with its dual purpose for saving for a first home and for retirement meaning it can appeal to two very different groups of people.
“However, with the 25% government bonus the product is unbeatable for many wannabe homebuyers, while also providing a good incentive for some pension savers.” Suter said: “More than 750,000 people paid into a Lifetime ISA in the 2022/23 tax year, with just shy of £1.9bn paid into the accounts, showing how popular they are.”
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The five types of saver include first-time buyers, self-employed people, people aged 39, mega pension savers and Help to Buy ISA savers. She said: “The 25% government bonus on offer is effectively the same as in a pension for basic-rate taxpayers up to the £4,000 limit, but Lifetime ISA funds have the flexibility to be withdrawn early and completely tax-free after age 60. Pensions, on the other hand, generally can’t be touched until you reach age 55 and only 25% of the fund would not be subject to income tax.”
“However, savers have to bear in mind the age restrictions on the account – you cannot open it after your 40 th birthday and there is a block on bonus payments from age 50.” Ms Suter said: “For anyone saving for their first home, the Lifetime ISA is pretty unbeatable with the 25% government bonus boosting your deposit savings. If you pay in the maximum £4,000 per year, you’ll get a juicy £1,000 bonus from the government – giving an immediate 25% top-up to your savings.
“If you had saved £4,000 into a Lifetime ISA for each of the past nine tax years since the account was launched and had seen 4% investment growth a year, you’d have a pot worth £48,000. However, if you’d saved that same amount of money in a standard ISA, still earning 5% return a year, you’d have a pot worth just over £38,000. That means by shunning a Lifetime ISA you’d be £10,000 worse off.
“However, the property limit for the Lifetime ISA is £450,000 and has remained at that level since its launch in 2017 with no signs of it increasing, despite many calls for it to do so.” Ms Suter went on, adding: “You might have already bought your first home and have a pension with your employer, but you don’t know what the future might bring and so it could be smart to open the account so you could use it in the future.”
“Help to Buy ISA accounts are now closed for newcomers, but many people still have the accounts open and their deposit savings in there. However, they may be better off moving to a Lifetime ISA for a couple of reasons,” she commented.
“First, the property limit. With the Help to Buy ISA you can use it on a property worth up to £450,000 in London, but only on a property worth up to £250,000 outside London. This has proved a problem for some outside of the capital. With the Lifetime ISA there is a limit of £450,000 regardless of what area of the UK you’re buying in. So if you’re priced out of the Help to Buy ISA, you could transfer to a Lifetime ISA.
“Second, the maximum government bonus. Both the Help to Buy ISA and Lifetime ISA get the same 25% government bonus, but with the Help to Buy ISA this is limited to the first £12,000 saved – meaning a maximum bonus of £3,000. With the Lifetime ISA you can get up to £1,000 a year in government bonus, up until the age of 50. If you opened a Lifetime ISA at age 18, that is a maximum government bonus of £32,000. If you’ve maxed out your Help to Buy ISA bonus and still have more to save, you could switch to a Lifetime ISA.”
Ms Suter said: “Lifetime ISAs are also a good option for those who have maxed out their pension savings but still want to put away more for retirement. The pension annual allowance has increased, so most people have £60,000 a year they can put into their pension (assuming they have sufficient earnings), plus any unused allowances for up to three years.
“But some high earners will have a lower limit, thanks to the tapered annual allowance. Either way, if you’ve hit your annual pension allowance you might want to use the Lifetime ISA to squirrel away up to £4,000 a year extra for your retirement savings.”