Introduced three years ago, the Lifetime ISA (or LISA) allows you to save for a first home while receiving government help.

Over 400,000 people have taken out a LISA, but is it the right choice for you or your loved ones?

What is a LISA?

Available to anyone aged 18 to 39, you can save toward a first home and get an additional 25% bonus from the government each year.

The LISA Allowance for the 2020/21 tax year is £4,000. This means you can receive up to £1,000 a year from the government.

However, you must put your invested funds toward buying a first home. If you don’t, you’ll need to keep it invested until age 60 or become liable for a 25% penalty on withdrawal.

Reasons to consider a Lifetime ISA

If you, or your child or grandchild, are looking to get onto the property ladder you may consider a LISA to be a good choice.

You can invest up to £4,000 a year and receive a 25% monthly bonus from the government. The bonus is added to your investment amount, so the whole sum then earns interest. If you keep hold of your LISA, the bonus is paid up until you reach the age of 50.

Making use of the full £4,000 allowance from age 18 until aged 50 would mean you or your child receiving £33,000 in government bonuses.

A LISA is an individual account, so that means a couple can open one each. You’ll then receive two government bonuses. You can also still invest in any other ISAs you hold.

Your £4,000 LISA allowance is subtracted from your £20,000 annual ISA Allowance. If you invest the full £4,000 into a LISA, you’ll have £16,000 left to pay into your other Cash, or Stocks and Shares, ISAs.

Why might you NOT choose a LISA?

The main issue with a LISA is that you’re effectively locked in – you either use the amount as a deposit for a first home or you leave it invested until you reach the age of 60. Withdrawing money before the age of 60 or using the money for something other than a first home, will result in a 25% penalty.

This could mean you get back less than you put in.

Let’s say you take out £12,500 — £10,000 plus the 25% bonus of £2,500. The 25% exit fee on the full amount will be £3,125.00. You will receive just £9,375.00.

The Telegraph recently reported that in the three years since their introduction, LISA charges could have totalled as much as ‘£800,000 according to data from providers with a combined 43,000 customers.’

Plans can change, but if they do you might incur a hefty penalty. As far as possible, be sure that you or your loved one will use the money for a property purchase, or that they can wait until the age of 60 before accessing it.

Another reason you might opt not to take out a LISA is the age limit. You must be between 18 and 39. The closer you are to 39 the more you’ll need to consider whether the remaining years of government bonuses make it a worthwhile choice.

Finally, you can’t use the money to buy a first home with a value above £450,000. This could mean missing out on the property you want, especially if you’re looking to buy in London or the south east.

Alternatives to the LISA

The obvious alternative to the LISA was the Help to Buy ISA, a product that closed to new savers in November of last year. This might result in more LISAs being taken out, but if you think it’s not the right option for you, consider these alternatives.

  • The Bank of Mum and Dad

The sixth-largest lender in the country, the Bank of Mum and Dad might be a good choice. Whether through gifting or borrowing, be sure to agree terms and conditions at the outset and this might be an effective way to acquire a deposit.

  • Buy with friends or family

Buying a home jointly might mean you can club together to reduce the amounts needed individually. This is not something to enter into lightly though. Think about all the ramifications and be sure to take legal advice.

  • Help to Buy

You can use the Help to Buy scheme if you’re looking to buy a new-build home. You pay the portion of the deposit you can afford, and the government lends you the rest – up to a further 20%. The loan is free for the first five years. Once Year 6 starts, you’ll need to pay the annual fee, so you’ll need a plan in place to make sure this is feasible.

Get in touch

If you or a loved one is looking to get onto the property ladder, at HA&W we can talk you through all the options available. Please contact us if you’d like to discuss a Lifetime ISA or any alternative.

Please note

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.