what is lifetime ISA and is it worth having one?

Today I want to cover an interesting topic in my view – lifetime ISA. These products are not known or used by as many people as other ISAs are. That however is a real shame. The benefits of these in my personal view outweigh the issues that these have.

I will cover the basics of what a lifetime ISA is below. I will also give my personal view on the key benefits to be aware of.

As well as the pros, I will also cover the cons that come with these. This should hopefully give you a full picture to make up your mind. The question to answer for yourself – will the below benefits be worth it to you personally or not.

what is a lifetime isa

Lifetime ISA or LISA as it is known – is one of many variations of tax free investment schemes in the UK. You can learn about the basics of what ISAs are and how to use these in this article.

In short – you can use £4,000 per year (out of the maximum of £20,000 you are allowed to save into all ISA types per year) and fund your LISA. The beauty of LISA is – you get the same tax free benefits while in addition the government ads 25% cash into your account for free.

YES – you heard it right! The government gives you free cash to top up your LISA. You can get up to £1,000 per year in free cash.

how to qualify for lifetime isa

There are a couple of rules with LISAs that are a bit more complicated than your regular ISA.

Firstly, you can open an account only between the ages of 18 and 39. If you are over 39, unfortunately this won’t be available to you.

Secondly, the limit of investing is capped at £4,000 per year as mentioned above.

Thirdly, you can keep funding LISA only until you turn 50.

While above rules are fairly strict, the extra 25% free cash from the government is surely worth considering, isn’t it? 

If you were to invest into LISA as of age of 18 and were to max out the account each year – you can theoretically get £32,000 from government. This money would be totally free. On top of that – any profits and gains you make in this account – these are tax free! 

what products you can invest into

This is the beauty of LISA. Not only you get 25% bonus for free but also can invest into anything you wish. This is the same as the rest of the ISAs. You can either save money in your investments and get a return based on your providers interest rates.

Alternatively, you can put the money into stock market and make it work there. Treating it as a retirement fund and investing for the long term can really unlock some impressive results for you.

Not only you get the free cash but also the benefit of long term market index investing.

While all of the above sounds like an incredible deal – please keep reading to understand a couple of cons that these types of accounts have.

when can you get your money out

You technically can get your money out at any point. This however is only technically! You need to see the full picture here in order to decide if LISA is right for you.

LISA was designed to help 2 types of people. First, it is the first time buyers. They can use LISA to fund the purchase of their first home. The value of this property however cannot exceed £450,000.

The second, is people who are looking to fund their retirement. This is where LISA unlocks its full potential. After you are 60 you can get all you money out. You also get the maximum benefit from the interest compounding point go view.

In both of the scenarios above – you get the full value of your account which combines any interest made + the government free cash.

If you want to take money out and you don’t fall into either of the brackets above – that’s where the biggest con of LISA is. Keep reading the next paragraph to find out the reasons why.

what are the potential issues to be aware of

As I mentioned above – technically you can get your money out at any point. The reason I say technically – you could be charged with a penalty if you don’t fall into a first home buyer or after the age of 60 bucket.

If you were to decide to get your money out at a different point in your life – you will be charged 25%. On top of that, the platform you choose to use might have additional fees for you to consider.

As a result of the above, there is a high probability that you could get less cash out compared to what you have saved and deposited over time.

This I would say is the biggest consideration when it comes to LISA. You have to have a clear goal in mind and commit to money being invested for the long run.

summary

You now know the full picture of pros and cons that LISA brings with it. As I mentioned at the start of the article – the list of pros is worth considering. For those who look to get on a property ladder – in my view this is a no brainer. Let the government fund your first home for you.

On the other hand – if you aren’t as confident in what the future might look like, potentially a different type of ISA could do a job better for you.

If you are not sure when you might want/need to access the cash in your account then LISA could actually end up losing you money rather than doing the job you want.

If after reading the above you believe that LISA is right for you – google can help you find many providers to open your account with. One of these examples can be found here.