Loving Your LISA?

LISA - the Lifetime ISA was meant to be a great way of helping people onto the housing ladder and it's been popular with £4.3bn of savings held in Lisas in 2022 - but it has attracted criticism for not doing the job very well. So what are its pros and cons and why is like an umbrella?

Q: What is a LISA?

A: A LISA is a type of savings account that was designed specifically for people aged 18-39 who are saving for their first home or retirement. The best way to think of it is as a wrapper or an umbrella, which protects what's underneath it. While an umbrella keeps the rain away, a LISA protects your money from being taxed.

Q: What is the difference between a LISA and an ordinary ISA?

A: The big and truely amazing thing about a LISA is not only that it is tax-free but the government gives you free money as well.

The government adds a 25% bonus on top of what you save. That means you could get a maximum if £1,000 of free cash every year

Plus, just like an ordinary ISA, you earn interest on whatever you save and that interest is tax-free.

Q: How much can you put in?

A: You can save up to £4,000 a year in a LISA as a lump sum or by putting in cash when you can.

You can put up to £20,000 in all your ISAs in any tax year – and the money you put in your LISA will count towards that. So if you put £4,000 in the LISA this tax year, you'll be able to put £16,000 into other ISAs - the 25% government bonus isn't counted towards that year's ISA allowance.

Q: So what are the age restrictions?

A: You need to be between 18 to 39 to open a LISA. You can continue to put money into the LISA until the day before your 50th birthday. Once you're 50 or over you'll continue to get interest or investment growth/losses but you won't be able to pay in any more.

Q: What type of LISAs are there?

A: A Cash LISA works just like an ordinary savings account. You put money in and the provider pays you an interest rate of which no tx is deducted. It also its outside your £1,000 tax-free interest allowance each year.

Investment LISAs involve investing your savings in a range of investments such as shares and bonds. There is clearly a risk here that the investment value may fall.

Q: Can I and my partner open LISAs and use them to buy a shared home?

A: If you're both first-time buyers buying a property together costing £450,000 or less – you can both open one and save in it, this getsyou double bubble - so get £2,000 free cash every year. However even if you're both using the LISA, the £450,000 property price limit remains, in other words it doesn't double because you're both using the LISA accounts.

Q: How to withdraw the money?

A: When you're ready to buy, get the LISA provider to transfer the cash to your solicitor, not to you, as any transfers to accounts in your name, incur a penalty withdrawal charge of 25%.

Q: Sounds great - so why have they come in for so much criticism?

A: There are only three ways in which you can withdraw money from your Lisa without paying a withdrawal penalty:

1. If you are using the money to buy your first home, which must cost £450,000 or less.

2. If you are at least 60 years old

3. If you are terminally ill

Otherwise, you will be charged 25% of the amount withdrawn. This means losing the full government bonus, plus 6.25pc of your original investment.

Just as the government hasn't changed the level of tax bands, it hasn't changed the £450,000 house price cap since 2017 despite soaring house prices. The cap would now have reached £595,192 if it had risen in line with house price inflation, according to analysis by AJ Bell.

More than 185,000 savers have been fined a total of £127m for withdrawing their own money since the scheme was introduced, according to data obtained by a Freedom of Information request.

If you want to ask a question or share an opinion on our Times Radio Money Matters slot do get in touch HERE