Is Lifetime ISA an opportunity or a disaster for you?

The Lifetime ISA is launched in April, and while only a few products will be on the market by then, we can expect it to be a booming business over time. The question is whether we should be snapping up a Lifetime ISA, or whether it would end up being an expensive mistake.

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See also: Could Lifetime ISAs seriously damage your wealth?


The short answer to this is "it depends", but the long answer is more useful.

What is it?

The Lifetime ISA is a savings vehicle designed for young people. The idea is that anyone between the age of 18 and 40 can invest in one - and as long as you have opened it by the age of 40 you can keep contributing to it until you are 50. You can put up to £4,000 a year into it - either as a lump sum or as regular contributions. The state will then add a 25% bonus on top. This is in addition to any interest or investment gains within the account you choose.

The money can be used for two things: it can be used by first-time buyers as a deposit on a house (as long as the house doesn't cost more than £450,000). This can be bought at any time - as long as the LISA has been open for at least 12 months. It can also be used in retirement, once you hit the age of 60. If you use it for either of these purposes it's tax free. If you use it for anything else, you'll lose the government's bonus and pay 6.25% on the amount you put in.

First-time buyers

The experts agree that this is a great way to save for a first home. Danny Cox a Chartered Financial Planner for Hargreaves Lansdown, says it should be the first choice for people aged 18-40, explaining: "No other ISA offers as generous a government top up (the Help to Buy ISA offers a 25% top up, but the maximum amount you can save is more limited and the bonus isn't paid until completion of a property purchase)."

If you already have a help-to-buy ISA, Cox says it's worth considering transferring this to a LISA before 5 April 2018, to make things simpler and more flexible. He explains: "The LISA offers higher contribution allowances, the option to build a bigger deposit by investing rather than just saving in cash, and a more immediate bonus payment, all of which suggest LISA is the preferable option for investors in the target age range. Government rules allow the Help to Buy ISA to be transferred into a Lifetime ISA in the 2017/18 tax year without counting towards the £4,000 Lifetime ISA limit."

The exception, he explains, is if you want to buy a property within the next 12 months, as you have to wait a year from the point of opening your LISA before buying a house. If you plan to buy sooner, it's worth sticking with your Help-to-Buy ISA.

Retirement
If you want to use it for retirement savings, however, it's not such a dead cert. Cox explains: "A Lifetime ISA can be used to save for retirement, however a workplace pension should be the first port of call to pick up valuable employer pension contributions." Steven Cameron, Pensions Director at Aegon agrees: "Virtually all employees will be better off making full use of their workplace pension where they receive a valuable employer contribution."

And if you plan to use it for saving for both a property and for retirement, there's another problem. Cox explains: "If your home purchase is in less than 5 years away, cash is the most sensible option, even though interest rates are pretty miserable at the moment. However for those expecting a longer run in to get on the housing ladder, stocks and shares offer the potential for higher returns, though of course with greater risk to capital."

As Cameron says: "While the ability to use LISA to save for either a first house purchase or for retirement may seem like a positive and flexible feature, it creates real challenges when it comes to deciding on an appropriate investment strategy. Short term saving for a house deposit suggests a cautious, cash-based investment while stockmarket investments, with scope for above inflation returns, are more suited if saving long term for retirement. An investment strategy that doesn't match savings objective can have disastrous consequences and this poses real challenges for any saver undecided on what they plan to use their LISA for."

Be quick
If you do plan to get a LISA, Cox warns that you may need to be quick - especially if you are approaching 40. He says: "If you're turning 40 soon, you need to make sure you set a LISA up before your 40th birthday to ensure you can continue to save into a LISA up to your 50th birthday."

Even if you're at the bottom end of the eligibility age rage he says: "The longer you save into a Lifetime ISA, the quicker you will reach your target deposit and step onto the property ladder."