Looking ahead to 2021, are you (or is someone you know) looking to get onto the housing ladder or build up a retirement fund? The Lifetime Individual Savings Account (LISA) could be a great option. This tax-efficient savings and investment vehicle offers considerable benefits.
In this article, our team here at Vesta Wealth offers this short guide on how the LISA works in the 2020-21 tax year, as well as some ideas about how it can be used effectively within a financial plan.
We hope you find this content useful and invite any questions you may have about how this could affect your financial goals and circumstances, via:
t: 01228 210 137
e: [email protected]
The LISA – an overview
With a LISA you can save up to £4,000 within a given tax year. The funds must either be saved for retirement or towards the purchase of your first home (worth up to £450,000), in which case the UK government will top up your savings by 25% i.e. £1,000 if you make use of your full allowance each year. If you cash it in early for any other reason, other than serious ill health, the government will apply a penalty.
You can open a LISA between the ages of 18 and 39; once established the account can receive payments until you reach your 50th birthday.
Your £4,000 LISA contribution limit forms part of your overall annual ISA limit, which in 2020-21 is £20,000. So, if you put the full £4,000 into your LISA in a given tax year, you have £16,000 left to put into other ISAs.
To illustrate how attractive this could be, assuming you opened a LISA account at age 18, investing the maximum £4,000 each year until the age of 50, the UK government would have paid £33,000 in top ups i.e. £4,000 x 33 x 25%. LISAs can also be combined in situations where partners/spouses wish to buy a property together, in which case you might both be able to eventually put £66,000 towards the purchase of your first home. By this time, of course, you would both be in your early fifties, but this might work for some people e.g. those happy to rent early in their careers and then buy together later.
Where to use a LISA
Although LISAs offer benefits for first time buyers and as a retirement savings plan, for most people the purpose of their LISA is to help them get on the housing ladder.
When looking at retirement planning, a LISA allows no penalty access to the funds from age 60, whereas a personal pension plan cannot be accessed before age 55 unless you are in ill health (although the government has said that it intends to raise this to 57 from 2028 and to review it regularly in future in line with state pension age changes).
For many people, pensions will be a better choice due to tax relief and any contributions which may be paid by the employer. Remember though that when you draw a pension the income is taxable, but you may be eligible for a tax-free lump sum of up to 25% on retirement.
For first-time buyers, there are more compelling reasons to consider saving into a LISA as the extra £1,000 from the government each year provides higher investment growth potential for young people than investing in stocks and bonds outside a LISA structure. This represents a guaranteed 25% return, on top of whatever extra your investments might achieve. Over a 10-year period, for instance, even setting aside this growth, the 25% government LISA top up would represent £10,000 for a single person and £20,000 for a couple looking to buy together (added on top of £40,000/£80,000 saved, respectively). Having a larger deposit may provide a lower mortgage interest rate and it may make all the difference between being able to buy a home or not.
In practice, many of our clients who are eligible for both might consider saving in a LISA and a pension at the same time, although you should speak to your Financial Planner if you are considering this.
Invitation
As we approach the end of December, we encourage readers to use the Christmas break to reassess your savings and investment strategy, to ensure everything is still on track as you enter the next year.
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.