The Lifetime ISA is subject to a Parliamentary review as it looks to consider whether the savings vehicle is fit for purpose.<\/p>\n
The Treasury Select Committee in the House of Commons is calling for evidence to gauge whether the Lifetime ISA remains relevant in the current savings landscape.\u00a0The committee is considering whether the Lifetime ISA works in its current format, whether people who use it for a house purchase go on to use it for retirement savings and whether it presents \u2018value for money\u2019 for the Government.\u00a0The committee is also seeking views on whether reforms to the savings product would help to improve it, or whether it should be scrapped entirely.<\/p>\n
What is the LISA?<\/strong><\/p>\n The Lifetime ISA or \u2018LISA\u2019 is a tax-free savings account created by the Government in 2016 to help savers with the specific goal of saving for a house deposit, or for longer-term retirement goals.\u00a0The maximum a saver can deposit in a LISA in each tax year is \u00a34,000. It offers a 25% annual bonus on this \u00a34,000 \u2013 meaning the Government will top up contributions by up to \u00a31,000 each year.\u00a0Savers need to be under the age of 40 to open a LISA. The money can only be redeemed in order to contribute toward a first-time property purchase deposit.<\/p>\n Alternatively the saver can use the LISA as a retirement savings alternative to a pension and can access their cash when they turn 60.<\/p>\n Drawbacks<\/strong><\/p>\n LISAs can either come as cash or stocks and shares versions. It is important to note that cash LISAs have Financial Services Compensation Scheme (FSCS) protection of \u00a385,000.\u00a0Stocks and shares versions also offer FSCS protection \u2013 but only if the provider company fails. If the value of the investments in the LISA falls, this is not protected.\u00a0The LISA\u2019s bonus is perhaps its greatest benefit, as it provides a significant boost to the user\u2019s savings.<\/p>\n However, the reason why the LISA is now subject of a committee enquiry (which is potentially looking at recommending abolition) is because the product has significant drawbacks.<\/p>\n The LISA can only be used to purchase a property worth less than \u00a3450,000. This makes it harder for those living in areas such as London \u2013 where house prices are largely much higher \u2013 to be able to use the product for a deposit.\u00a0You can only use the LISA for its stated purpose 12 months after initially opening the account.\u00a0For anyone who wishes to withdraw the money without using it for retirement or a house deposit, there is an effective 25% penalty.\u00a0For instance: if you pay in \u00a3100, you receive a 25% bonus which would be \u00a325. But if you then wish to withdraw your money, the Government penalises you with a 25% penalty on the whole \u00a3125 \u2013 which would mean you end up getting only \u00a393.75 back.<\/p>\n As for its use as a retirement product, it is arguably extremely limited compared to a pension. For instance, the annual contribution limit on a pension is very generous at \u00a360,000 \u2013 compared to just \u00a34,000 for a LISA.\u00a0Pensions offer tax relief at either 20% or 40% \u2013 depending on whether you pay the basic or higher rate of income tax. While the LISA offers a more generous 25%, this is limited to \u00a31,000 unlike pensions tax relief. It is also inferior for those who earn in the higher rate band.\u00a0The one saving grace in this regard is that pensions have tax implications once you look to withdraw your savings, whereas the LISA benefits from the tax-free treatment of an ISA on withdrawal (as long as you\u2019re meeting the basic conditions).<\/p>\n Alternatives<\/strong><\/p>\n The LISA has no direct comparative product when it comes to the house deposit bonus. The Help To Buy ISA was in the past an alternative, but is no longer open to new customers.<\/p>\n As for retirement, a pension is the most obvious alternative, but as mentioned comes with a very different set of rules and benefits.<\/p>\n The other alternative to a LISA would be a regular ISA \u2013 either in the cash or stocks and shares version. While the main ISA offers a \u00a320,000 annual allowance, there is no Government bonus to maximise contributions.<\/p>\n Time up for the LISA?<\/strong><\/p>\n The LISA\u2019s problem is that it suffers from a reputation for complexity, inflexibility and limited usefulness. This is why the Treasury Committee is considering the issue.\u00a0However, the Committee does not set Government policy, it only seeks to influence opinion within Parliament.\u00a0The Government, despite years of calls for reform of the LISA, to date remains taciturn on the product and whether it plans to abolish it.<\/p>\n For anyone who thinks it could be a useful addition to their financial plans it can still be an effective product for its stated purposes.<\/p>\n However, it is essential to keep in mind its limitations and use it to complement more generous schemes such as pensions when saving for the long-term.<\/p>\n","protected":false},"excerpt":{"rendered":" The Lifetime ISA is subject to a Parliamentary review as it looks to consider whether the savings vehicle is fit for purpose. The Treasury Select Committee in the House of Commons is calling for evidence to gauge whether the Lifetime ISA remains relevant in the current savings landscape.\u00a0The committee is considering whether the Lifetime ISA works in its current format, whether people who use it for a house purchase…<\/p>\n