In a nutshell:
A Lifetime ISA is a way to grow money tax-free. You can put up to £4,000 into a LISA in either Cash or Stocks and Shares, but you can only use this money to buy your first house or for retirement (or incur a withdrawal penalty).
- Best for either first time house buyers or for retirement.
- Contribute up to £4,000 per year.
- Government will match 25% of investment (max £1,000).
- Risk free 25% return
- What is a LISA?
- Choosing a Platform
- LISA Strategy
What is a LISA?
First, an Individual Savings Account, or ISA, is a ‘tax-free wrapper’ allowing an individual to invest up to £20,000 before the end of the tax year.
A Lifetime ISA allows an individual to invest up to £4,000 per year, and the government will give a 25% bonus on top of this – meaning a maximum of £1,000 can be received from the government. This results in a risk-free 25% rate of return that is very difficult to find elsewhere.
Money invested in a LISA can then be used either towards your first home or for retirement. You can either invest as a lump-sum, or throughout the year, to fit your personal preferences. If you do invest the full £4,000, you will have £16,000 left for your remaining ISA allowance in the tax year, which can be used for Cash ISAs or Stocks & Shares ISAs.
Money can be invested into a LISA as either Cash or in Stocks & Shares. Generally speaking, if you are planning on using the money for a house deposit in the next 5 or so years, using a Cash LISA would be wiser. On the other hand, if you are using a LISA for retirement purposes then it may be better to look into Stocks & Shares, and invest in an index fund, for example.
You can open a LISA between 18-39 years of age, and are able to pay in until you are 50. Assuming you pay in £4,000 for the full 33 years possible, you can earn a maximum of £33,000 in risk-free money from the government.
It is important to note that early withdrawals have 25% penalty. This actually results in a loss of roughly 6%, as you get penalized on both money invested by yourself and on the government bonus.
Choosing a Platform
Unfortunately there are not many providers or LISAs. I am a fan of Vanguard, but at the time of writing Vanguard do not offer a LISA. Nevertheless there are some options:
Currently, the best Cash LISA provider is Newcastle Building Society who offers a 1.1% interest rate. Therefore, after the first year, taking advantage of this interest rate and the government bonus you would have £5,044.
A second option is Skipton Building Society who currently offers 1%.
Currently, the best Stocks & Shares LISA provider is AJ Bell, who offers a range of different investments – shares, index funds, ETFs, all for an annual fee of 0.25%, which is the lowest annual fee provider. The return each year depends on the shares or funds you have invested into, but the 25% government bonus is guaranteed each year.
A second option is Hargreaves Lansdown, which similarly has a wide range of shares, index funds and ETFs, but for a higher annual fee of 0.45%.
Firstly, if you plan on opening a LISA you want to avoid withdrawing because of the withdrawal penalty involved.
Therefore, you will either be saving for a house, or for retirement (or both).
For a LISA strategy, there are three choices to consider:
- Cash LISA or Stocks & Shares LISA
- Investing for a house deposit or for retirement
- If using a S&S LISA, what share/fund/ETF to choose.
Firstly, you have to choose between investing in a Cash LISA or a Stocks & Shares LISA. If you are planning to use the money for a house, in the nearer future, it would be better to choose a Cash LISA. This is because you only want to be investing in Stocks & Shares if you are investing for 5-10+ years to ride out any recessions and downturns. In this case, utilise the 1.1% top Cash LISA rate. Conversely, if you are investing for retirement, which could be decades away, it makes more sense to invest in a Stocks & Shares LISA, as you can recover losses from recessions over the long term.
Secondly, you can use a LISA to either save for a house deposit or for retirement – you will need to decide what you would like to use your LISA for. However, you are also able to do both – use your LISA first to contribute towards a house deposit, and then for retirement after, once you are a homeowner.
Thirdly, you will need to decide what product to put into your LISA. For a Cash ISA you do not need to choose a product. For a Stocks & Shares ISA, it is a good idea to invest in a global index fund such as Vanguard’s FTSE Global All Cap Index Fund. See our previous post for more details on investing in Stocks & Shares.
That’s the essentials of a LISA.