Millions of investors will be considering whether the Lifetime ISA (LISA) is the right savings option for them ahead of its debut in less than two months’ time.

Here, I assess four key issues people need to know ahead of the 6 April launch date.

1. Age restrictions 

The Lifetime ISA will be attractive to lots of savers, with up to £1,000 of free money available from the Government if you pay in the maximum of £4,000 a year.

However, it is not for everyone – only people under the age of 40 are eligible to open a LISA, and the Government will only pay you the 25% bonus on contributions up until age 50. While the Government might want to review these restrictions depending on take-up, for now the product is focused squarely on encouraging younger people to save.

2. Year one – no partial withdrawals

The first year of the LISA will be ‘all or nothing’ when it comes to withdrawals – savers will have to either leave their money invested for the entire period, or take the whole lot out and close the account. From April 2018 onwards partial withdrawals will be possible, although investors will have to watch out for any exit penalty they might incur.

3. Exit penalty – the sting in the tail

Where money is taken out of a LISA for a first home purchase, where the person is terminally ill, or from the age of 60 onwards there will be no charge and no tax to pay. However, withdrawals in all other circumstances will be
hit with a 25% exit penalty.
Our analysis shows that, if someone pays in £4,000 a year over a 20-year period, the exit charge could be almost double the value of the Government bonus.

4. Think carefully before opting out
Investors eyeing the LISA but keen not to see their monthly take-home pay drop too much might be tempted to opt-out of their auto-enrolment pension. This would be a bad idea in almost all circumstances. Under auto-enrolment all employers will eventually be required by law to match your first 3% of contributions, and many will offer an even better deal. While a pension might be less flexible than a LISA, the matched contribution is effectively a 100% bonus – dwarfing the 25% LISA bonus.

The Lifetime ISA exit penalty in action

Jane, a 25-year-old accountant, likes the look of the LISA and wants to take advantage of the Government bonus and save for her first home. She pays in the maximum of £4,000 a year for five years, but then decides to ‘quit the 9-to-5’ and use the money to travel the world.

Her pot value was boosted by £5,000 of Government bonuses and 4% investment growth after charges, meaning it is worth just over £28,000 when kept in the tax wrapper. However, her early withdrawal triggers a £7,000 exit charge – £2,000 more than the Government bonus she has received – meaning she only gets £21,000.

TOM SELBY,
Senior Analyst, AJ Bell

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