Lifetime ISAs are a controversial new way to save that compete with pensions.
Financial experts are concerned that if consumers are not clearly told how lifetime ISAs (LISA) work, advisers could face a misselling scandal in the future.
Below are some of the key facts about LISAs and whether they are suitable investments – but still discuss your saving and retirement options with an IFA before deciding about the best way to save for you.
LISAs give a 25% savings bonus
The government promises to uplift LISA savings of up to £4,000 a year by 25% – after the first year that means contributions added to a LISA, not cash in the fund.
So, the bonus is £1,000 if you set aside the maximum of £4,000 each year in your LISA.
How does a LISA work?
You can open a LISA if you are aged between 18 and 40
There’s no set monthly contribution – you can save as much as you want each year up to a maximum of £4,000.
The 25% bonus applies to any savings made before your 50th birthday
How can I spend my LISA savings?
A LISA can be for two specific savings goals – Either a deposit on the saver’s first home valued under £450,000 or as retirement savings that can be withdrawn tax-free from the age of 60.
Saving for a home
Two first time buyers can each save into a LISA and both receive the 25% bonus
If you have a Help to Buy ISA, the money can be transferred into a LISA
Saving for retirement
If someone saves cash in a LISA for retirement and withdraws some or all the money before the turning 60, they lose the government bonus, including interest or growth on the bonus, and must pay a 5% early exit penalty.
Financial experts also warn that opting for a LISA instead of enrolling in a workplace pension also means losing any employer contributions toward retirement savings
Why are LISAs so controversial?
The retirement saving aspect is the problem – financial experts believe LISAs are not as tax efficient as pensions and workers will end up with less money in their pot compared to saving the same amount of money in a workplace pension with employer contributions.
