The Lifetime Individual Savings Account or LISA, as it is often shortened to, was launched in April 2017. Aimed to encourage young people (specifically those aged 18-40 years old) to simultaneously save for their first home and retirement as both are major concerns for the younger generation.
There has been a lot of noise around if ISA’s are still a viable savings option. Our article, ‘Can you still make money from an ISA?’ gives light on this question. This article concentrates on the tax breaks of a Lifetime ISA.
Key points of LISA
Our article ‘LISA – A flexible way for under forties to save’ discusses LISA in great detail, but below is a recap of the key points to note:
- Open to anyone aged between 18-40
- You can pay in contributions up to £4000 each year
- The government contributes a bonus of 25% (up to the value of £1000) at the end of each tax year
- Interest is added to both the contribution and the bonus
- The bonus is given on contributions up the age of 50
- Money contributed can be held in cash, stocks or shares
Important point: If the money paid into a LISA is used for anything other than a deposit for a first home or retirement after the age of 60, you will be hit with a penalty fee, which is calculated at 25%.
Tax breaks for LISA
Points to consider:
- Unlike pensions, employers can’t contribute into a LISA
- You can withdraw money from a pension from 55 years, this is set at 60 years old with LISA
- You do not receive tax relief on the contributions made into a LISA, whereas you do with pension contributions
- Tax is not payable on money withdrawals for retirement with a LISA
- Withdrawals from a pension is paid at your rate of tax (i.e. Basic, Higher, Additional) after the 25% tax free lump sum has been taken
- For higher rate tax payers, pensions offer more tax benefits, as you receive 40% tax relief on pension contributions
Who can a LISA benefit?
Those who may benefit from contributing into a LISA include:
- self-employed workers, including freelancers and small business owners
- employees and contractors who don’t have a workplace pension
- those who are low earners, and
- workers who employers are paying in the minimum contribution to their work pension