A Lifetime Individual Savings Account is a tax efficient savings vector for both a first time house purchase or retirement. In this guide we cover what a LISA is and what incentives there are. We also look at the best LISA providers.
What is a LISA?
A LISA is a Lifetime Individual Savings Account. It operates very much like a normal ISA however comes with a few extra caveats, but also a few extra bonuses.
You can use a LISA to buy your first home, save for retirement or both.
You must be 18 or over and under 40 to open a LISA. Once open, you can contribute up to £4,000 per tax year until you are 50. You’ll earn a 25% bonus from the government on any investment.
If you are a first time buyer, you can use the funds in a LISA to purchase a home. Otherwise you can access the funds when you are 60 or over. You can also access the funds if you are terminally ill, with less then 12 months to live.
You can get hold of the funds outside of these circumstances however you’ll pay a 25% penalty. Note this is 25% of what you withdraw, hence you’ll lose more than just the bonus the government added. For example if you put the full yearly £4,000 allowance in and withdrew with the penalty, you’d only get £3,750 back meaning you’d have lost £250, 6.25% of what you put in.
What are the Benefits of a LISA?
A LISA can be a pretty lucrative was of growing your wealth.
The 25% government bonus on any deposits means an exceptionally good return on investment. Do you know any other investments that can guarantee a 25% return in a year?
The LISA also offers all the same tax free benefits that a standard ISA offers.
As long as you are buying your first home or saving for retirement the LISA rivals pretty much any other savings product. The only product type that may beat a LISA is a pension, and that will depend on your tax status and employer contributions.
What are the Types of LISA?
Just like a ‘normal’ ISA, you can select from Cash or Stocks and Shares options.
We’ve previously discussed some of the differences with Trading 212’s Cash ISA vs Stocks and Shares ISA. Which you pick will very much depend on your personal risk tolerance and your investing horizon.
If you are saving for a house purchase in a few years time then a cash LISA may make the most sense as you may not be able to afford a short term loss.
If however you are saving for retirement then you naturally have a much longer investing horizon. Even if you open a LISA at the last possible moment, the day before your 40th birthday, you have 20 years before you can access the funds penalty free. This is a good amount of time to ride out any stock market dips. You can likely afford to take more risks and hence investing is likely to give you a better return on investment. You can of course pick your own investments within the LISA.
How to Pick the Best LISA
All the same principles that we discussed in our guide to picking the best ISA apply to picking the best LISA provider.
You will find that the selection of LISA providers is significantly smaller. This is largely down to the over head involved in managing the LISA. Providers want to make money, hence the additional requirements on them to manage LISAs come at a cost. Having to work to claim the 25% bonus on your behalf, making sure you meet all the requirements for penalty free withdrawal and only seeing a maximum of £4,000 a year added per individual isn’t the most lucrative product for most platforms to offer.
For a cash LISA we’re looking for the highest possible interest rate, and a brand we trust.
For a stocks and shares LISA, we’re looking for low ongoing platform fees, a range of investment options and a cheap dealing fees.
When picking the best LISA for you, it’s important to consider how you want to invest. Dealing fees can add up, but if you are only going to invest once a year a £10 dealing fee for a lower ongoing platform fee is likely a much better deal than free dealing ut a higher ongoing platform fee.
What is the Best LISA Provider?
Best Cash LISA
The best cash LISAs on the market at the moment are from Moneybox, offering 5% and Tembo, offering 4.3%. Rates will change with the Bank of England base rate.
These rates are lower than the rates you can get with a cash ISA, for example Trading 212’s market leading 5.2%. That said, you obviously get the 25% bonus for the LISA!
Best Stocks and Shares LISA
There aren’t many LISA providers, so those looking for a stocks and shares LISA are limited to Hargreaves Lansdown, AJ Bell and Dodl (by AJ Bell).
Dodl comes in the cheapest but offers a very limited range of investments. If you are keeping your LISA investing simple, and Dodl offers an investment you want then this is a great option.
If you are looking for a wider choice of investment options then AJ Bell and Hargreaves Lansdown have the same 0.25% platform fee. The differences will be in caps on platform fees depending on what you invest in, and the fees to trade.
Both are reasonable value as long as you aren’t looking to trade too often as the fees will add up quickly.
Common LISA Misconceptions
LISA Early Access Penalty
Whilst the government add a 25% to your LISA contributions, the 25% withdrawal penalty if you don’t met the requirements means you lose more than you put in. In reality any penalty withdrawal will cost you 6.25% on top of losing the government bonus.
LISA Limits
You can pay in up to £4,000 a year into a LISA however this counts to your £20,000 ISA limit per tax year.
Across all your ISAs you may only pay in a maximum of £20,000 in any given tax year. If you go over this limit, there may be penalties applied by HMRC.
LISA Home Buying Restrictions
There are a number of restrictions around using a LISA to buy a home, explained on gov.uk. In short:
- You (and anyone you are buying a property with) must be a first time buyer
- The total value of the purchase must be £450,000 or less
- You must have made your first payment into the LISA over 12 months prior to purchasing
- You must buy with a mortgage
- A conveyancer or solicitor much act for you in the purchase
Should you get a LISA?
Buying a Home
If you are saving for your first home and it will be less than £450,000 then a LISA is a great shout. The 25% bonus is free cash to get you on the property ladder. Just make sure to plan ahead and open a LISA well before you want to buy.
Retirement: LISA vs Pension
If you are saving for retirement then the choice for a LISA becomes a little more complicated. Currently, you can access a LISA at 60 years of age and the state pension at 68. Depending on your tax status then a SIPP or additional contributions to your workplace pension may be a better option.
| Tax Bracket | Pension | LISA |
| Tax Free Personal Allowance (less than £12,571) | 0% | 25% |
| Basic Rate (£12,571 to £50,270) | 20% | 25% |
| Higher Rate (£50,271 to £100,000) | 40% | 25% |
| Higher Rate (£100,000 to £125,140) (UK tax trap) | 60% | 25% |
| Additional Rate (over £125,140) | 45% | 25% |
Pension contributions are subject to tax relief. The above table details the tax relief for each band of tax payer. LISA contributions are made after tax, hence the 25% bonus can be considered an equivalent tax relief.
In practice it’s a little more complicated than the table suggests. After the 25% tax free lump sum, withdrawals from a pension are subject to income tax. Withdrawls from a LISA once you reach the eligibility criteria are tax free.
Tax is also taken in stages, so if you straddle a tax band, anything over the threshold will be taxed at the higher amount, anything below, at the lower amount. You can also adjust your net income with pension contributions. This is something many earners in the £100-125k bracket do as in this bracket you lose your personal allowance and hence have an equivalent tax rate of 60%. Paying into a pension means you can claim the 40% tax relief and your adjusted net income cab be below £100k, hence not losing out on the personal allowance.
If you are a basic rate tax payer then open a LISA as you’ll be better off. If you are a higher rate tax payer or above then you’ll likely find your pension a better option, especially if your employer matches your contributions.
LISA vs ISA
If you are simply comparing against a standard ISA, then if you don’t think you’ll need the money until you are 60 a LISA is a route to free cash. If you need to access funds before then, stick with a standard ISA.
Personally, I’m not a first time buyer but I have opened a stocks and shares LISA with a view to a bit of a spread bet over my retirement planning!
