With Help to Buy gone, the Lifetime ISA is now the only option for first time buyers.
The government’s Help to Buy: ISA scheme closes its doors at the end of November. It’s had a pretty good run, helping 234,000 young people get on the property ladder in under four years.1
The Lifetime ISA (LISA) is the replacement option for younger savers – allowing them to save money for their first home or retirement while receiving a government contribution.
The product was launched in 2017 but has received little attention – or praise – in that time. It is seen as an attempt to satisfy short and long-term saving needs under one ISA wrapper.
Slow to take off
Since launching nearly three years ago, only ten providers have signed up to offer the product. The options for savers are therefore limited.
The LISA for first time buyers
In some ways, the LISA offers first time buyers slightly more flexibility than the Help to Buy: ISA. Firstly, the annual allowance is £1,600 higher. Secondly, the cap on property value is flat at £450,000. This is in contrast to the Help to Buy scheme, which places a £250,000 restriction on properties outside London.2
However, it is more restrictive for savers who may need to access their money early. There is a hefty withdrawal charge of 25% that's applied to the value of the entire pot, meaning savers could lose more than the government bonus should they choose to withdraw early.
The Lifetime ISA lacks the competitive advantage of the Help to Buy: ISA. Only three providers offer a stocks and shares option, and the interest rates are generally low on cash LISAs. Despite the higher allowance and government bonus, those looking to save for a property may be better off with a Stocks & Shares ISA.
The LISA as a pensions vehicle
The suitability of the LISA for retirement saving has also been called into question. In July 2018, MPs called for the product’s abolition over "its complexity, perverse incentives and lack of complementarity with the pensions savings landscape."
The 25% bonus under the LISA is far less generous than pension tax relief for higher earners, who can claim relief at 40 or 45% on their contributions, assuming anything over the basic rate is claimed via their tax returns.
Most people will still be better off saving for retirement via their workplace pension. This is because contributions not only attract tax relief, but also benefit from the all-important employer top up.
Nevertheless, the LISA can be useful for the few who exhaust their pension allowances and are unable to benefit from any further employer contributions. So if you are under 40 and fairly certain you will use up your annual pension allowance in the future, opening a LISA, in case you want to add to it later, could be worthwhile.
Take it or leave it?
As the only ISA option remaining for first time buyers, the LISA will have to do – as long as savers can keep their money untouched to avoid the withdrawal fee. As for pensions, it’s best to assess a range of options according to how well they fit your long-term needs.
"I don't think the LISA should be seen as a replacement for a pension. Workplace pensions can give you extra money from employer contributions and higher rate tax relief, so you will not get any more in a LISA. But if you want to buy a first home and are saving for a deposit, then the 25% government bonus is a good deal," says Tony Clark, Head of Retirement Marketing at St. James’s Place.
1. HM Treasury, Help to Buy: ISA Scheme Quarterly Statistics, December 2015 to March 2019
2. gov.uk, Lifetime ISA
Please note that Lifetime ISAs are not available through St. James's Place.
The value of an investment will be directly linked to the performance of the funds selected and the value may therefore fall as well as rise. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and generally depends on individual circumstances.
An investment in a Stocks & Shares Lifetime ISA will not provide the same security of capital associated with a Cash Lifetime ISA.
The favourable tax treatment of ISAs may be subject to changes in legislation in the future.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.