How you can get the government to help your clients retire early using a simple ISA allowance!

by Niki Gahan on 04·05·2023

The Lifetime ISA (LISA) scheme was launched by the Government in 2017 to help ‘millennials’ onto the property ladder. With a generous Government Bonus of 25% on a maximum contribution of £4,000 grossing this up to £5,000, this can provide a real boost and incentive to save for first time buyers.

However, this can also be used as a very effective way to save for retirement.

A LISA can be opened by anyone between the ages of 18 and 39.

As with any investment offering tax advantages, it comes with certain conditions in terms of access and flexibility. Any “unauthorised withdrawal” from a LISA will result in an exit penalty of 25% of the total value of the plan. However, it will pay out in full penalty-free in the event of death or a diagnosis of a terminal illness with less than 12 months to live at any time.

The LISA can be used towards the purchase of property for a first-time buyer provided:

• The property costs £450,000 or less
• The LISA is in place for at least 12 months when the property is purchased
• The LISA can only be used towards your first home. If you inherit property before buying your first home, you won’t be eligible for the scheme, even if this is sold on.
• The LISA can only be used on a first-time property you intend to live in. It cannot be used for a Buy-to-let mortgage. The property can’t subsequently be let out unless the circumstances of the homeowner change.
• You must also use a LISA in conjunction with a mortgage and not use it to buy a property outright.

However, in terms of a long-term savings plan, the rules are less stringent.

Contributions of £4,000 a year net (grossed up to £5,000 after the Government Bonus) can be made into a LISA from the age of 18. Although a LISA cannot be opened after age 40, contributions can continue until age 50. Although no payments can be made into a LISA from age 50 onwards, the LISA can stay open, and continue to earn tax-free interest or investment returns. The earliest the fund can be accessed is age 60.

For example, an investor taking out a LISA at age 20 and using this as a long-term savings vehicle, assuming a gross amount is invested each year of £5,000 until age 50 and investments grow at an average of 4% net a year, a fund of around £434,788 could be available at age 60.

For a 30 year old with contributions of £5,000 a year over 20 years with annual growth of 4%, a fund of around £228,592 could be available at age 60.

The fund available from age 60 can all be withdrawn tax-free with no restrictions.

This option to save for retirement could be particularly useful for those with no relevant UK earnings that have available funds for long term investment and are limited to pension savings of £2,880 net per annum with 20% tax relief.

It also offers a tax-efficient option for those subject to a tapering of their annual pension allowance to provide additional tax relief alongside any existing pension provision.

Although the annual net contribution of £4,000 that can be made into a LISA uses part of an individual’s annual ISA allowance of £20,000, if these savings are intended for later in life, why not benefit from the Government Bonus the LISA will provide?

All in all, the LISA provides the option to enhance long term savings and part of a tax-efficient retirement planning strategy. 

It is also a great way to engage with your older client’s mature children or even their grandchildren.  This is great for their legacy planning, but also to help you engage with the next generation of clients.