Lifetime ISA under threat

Nine years after the popular Lifetime ISA (also known as LISA) was created, the Treasury Committee has now launched a review to determine whether it is still ‘fit for purpose’ among other considerations.

Some points being reviewed include whether the deposit limits should be increased, whether the withdrawal penalty should be removed, whether the Lifetime ISA is ‘value for money’ for the Government, and the overall efficacy of the product.

Introduced in the 2016 Budget by former Chancellor George Osborne, the idea behind the Lifetime ISA was to provide an alternative method of tax-free saving for retirement while simultaneously encouraging people under 40 to save for a property by offering incentives which could help people get on to the property ladder.

However, in the nine years since it launched, there have been next to no adjustments despite house prices and living costs going up. The maximum savers can spend on a house using the Lifetime ISA is still £450,000.

According to figures from HM Revenue & Customs (HMRC), more than 1.5 million people are currently using Lifetime ISAs to save for their first property, with 230,000 people having already benefitted from the ISA.

The deadline for information gathering is 4 February, after which the Treasury Committee will deliberate on the best way forward for the Lifetime ISA, and even whether it should continue at all.

What is an ISA?

An ISA, or Individual Savings Account, is a scheme that allows anybody to hold cash, shares and unit trusts free of tax on dividends, interest, and capital gains. Essentially, it’s a savings account that you don’t pay tax on.

You can save up to £20,000 each tax year and receive tax-free interest payments, so when the value of your cash ISA increases, you get to keep all of it tax-free (source: gov.uk). 

The Lifetime ISA explained

You can only save up to £4,000 a year in a Lifetime ISA, and the Government guarantees that 25% of your investment will be matched. That means if you put the max amount of £4,000 in your Lifetime ISA each year, the Government will add £1,000.

The caveat is that the money accumulated in a Lifetime ISA can only be used to either buy your first home, or to be withdrawn after the age of 60, or in the exceptional case that you are terminally ill with less than 12 months to live. Withdrawal under any other circumstances incurs a 25% penalty to the entire pot. 

If you have £100,000 or more in pensions, savings and investments and would like to receive a free initial cash flow forecast, up to the value of £500, please arrange a chat here.  

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The Financial Conduct Authority (FCA) does not regulate tax and cash flow planning.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.