The Lifetime ISA, or LISA, is the latest tax-efficient savings plan from the government.
The Lifetime ISA rules are quite complex, but if you are a millennial keen to save for your first home, or if you are thinking about putting money aside for retirement, a LISA could be a good option.
And with a stocks and shares LISA, you have the opportunity to invest in stock market assets, rather than in a cash saving scheme.
Stocks and shares are more risky than cash, as the value of your investment can go down as well as up. But the flipside is that your investment has the potential to perform better than a cash deposit. Just remember that, with stocks and shares, nothing is guaranteed.
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Lifetime Stocks & Shares ISAs : Ordered A – Z
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Lifetime Stocks and Shares ISAs explained
You can open a LISA if you are at least 18 but under 40 years of age, and you can save up to £4,000 a year into the account.
The big attraction is the 25% government bonus (up to £1,000), which is paid each tax year until you reach the age of 50. In other words, if you opened a LISA on your 18th birthday and paid in the maximum £4,000 a year for the next 32 years, you could expect a total bonus of £32,000 (32 x £1,000).
The bonus is paid at the end of the first tax year (2017/18), but it will be paid monthly from April 2018, and is calculated according to your contributions. So, if you put £4,000 into the account and earn interest of £100, you will only get a bonus of £1,000 – 25% of £4000, not 25% of £4,100. However, once the bonus is paid it will be added to your savings and earn interest.
Terms and conditions
There are strings attached to the LISA. You must either use the money in your account to buy your first home, worth less than £450,000, or keep the money locked away until you reach the age of 60. If not, you have to pay a penalty and could get out less than you put in.
You can choose either a cash LISA or a stocks and shares LISA and the choice is largely determined by your time frame, goals and attitude to risk.
Cash LISAs are basically tax-free savings accounts, so there is almost no risk to your money. They are better suited to people who do not want to take any chances, are perhaps saving for something specific, and who can only put their money away for fewer than five years (the generally accepted minimum period for which you should hold a non-cash investment).
A stocks and shares LISA is different because it typically invests in company shares, usually through an investment fund. The value of your LISA therefore goes up and down according to the performance of the underlying investments – and you could lose money if the market turns against you.
Statistics show that stock-market investments tend to outperform cash over the longer term – which is where the five years comes into play. So, if you have a timeframe of more than five years and can handle the prospect of a few ups and downs along the way, you might decide on a stocks and shares LISA.
LISA in action
To see how LISEs will work in practice, here are some examples.
If you are 30 and hope to buy your first home before the age of 35, you might want to opt for a cash LISA. However, if you are in your 20s and are thinking of putting some money aside for the future, perhaps to boost your pension savings, then a stocks and shares LISA might be suitable.
You should, however, think very carefully before choosing to save in a LISA ahead of a workplace pension (if you have that option) because you could miss out on any employer contributions to a company scheme.
A LISA is not necessarily a replacement for a personal pension, either. First, the tax treatment is different. Plus, you can only pay into a LISA until the age of 50.
If you want to use the money in your LISA to take your first step on the property ladder, you can access your savings at any time, as long as you have held the account for at least 12 months. In other words, the first time eligible, penalty-free savings will available will be 6 April 2018.
Spend the money in your LISA on anything other than your first home, and you must wait until you are 60 to get your hands on the savings, or pay 25% of the amount withdrawn as a penalty.
You might think the penalty simply wipes out the 25& bonus, but you actually take a bigger hit. The 25% penalty takes into account the bonus and the interest or investment growth, which means if you paid in £4,000 and decided to access all your cash after the first year’s bonus, you would pay a penalty of 25% per cent of £5,000 and get back only £3,750 – less than you put in.
You can open a standard ISA alongside a LISA, as long as you don’t pay in more than the total ISA allowance of £20,000 for the tax year 2017/18. So, if you paid the maximum £4,000 into a LISA, you could still put up to £16,000 in a standard ISA.
Savers can also transfer cash from other ISAs into the Lifetime ISA, as long as they heed the £4,000 LISA limit. The government bonus of up to £1,000 a year does not count towards the annual ISA or LISA limits. Note that in the 2017/18 tax year, you can transfer any amount of savings from a Help to Buy ISA to a LISA.
Tax shelter
One advantage of a stocks and shares ISA is the shelter it provides from capital gains tax (CGT). You would normally pay CGT on any profits above £11,300 a year when you sell, but assets in an ISA are free from CGT.
Dividend tax
Since the start of the new tax year on April 6, 2016, all taxpayers have an annual tax-free dividend allowance of £5,000. Only dividend income above this allowance is taxed at new, higher rates.
However, from 6 April 2018, the tax-free annual allowance falls to £2,000. This potential makes it more important to shelter dividends from tax within an ISA.
ISA charges
It is important to be aware of charges on stocks and shares ISAs. Some funds levy an initial fee of up to 5%, plus an annual management charge of around 1%, which can eat into investment returns. You might also have to pay an adviser’s fees.
But if you don’t need advice, you can probably buy your funds cheaper though a discount broker or a fund supermarket.
Compensation scheme
The Financial Services Compensation Scheme covers ISA investments up to £50,000 if your ISA manager should go bust. But remember, the FSCS does not compensate for poor performance. Cash ISAs are protected up to £85,000 by the FSCS, as of 30 January, 2017.
How this page works
We want to show Lifetime stocks and shares ISAs from a range of providers to help you find the best option for you. We can't promise to have ISAs from every provider, because some don't want to be included on comparison websites. We list these ISAs alphabetically from A to Z. You can find out more about how we work here.
