This is why you should open a Lifetime ISA – while you still can

Lifetime ISAs (LISA) are soon to be replaced with a new first-time buyer (FTB) ISA, though they are not expected to arrive until 2029.

We don’t know all the details just yet – hopefully more are coming in the Budget – but we know that the new product will be for homebuyers only, not retirement savers, which marks one significant departure from the current LISA product.

If you already have a Lifetime ISA, you’ll still be able to contribute and receive government bonuses.

But if you don’t yet have one, here’s why you should open one while you still have the chance.

Why are Lifetime ISAs being replaced?

Lifetime ISAs, or LISAs, come with a complex set of rules.

For example, you can use one to save either for your first home or for retirement, and it comes with a choice of a cash LISA or a stocks and shares LISA.

You can contribute up to £4,000 per year as part of your overall £20,000 ISA annual allowance, and for LISA users the government will add a 25 per cent bonus – so up to £1,000 extra per year.

People can open a LISA between age 18 and 40 and contribute until age 50.

You can use your savings for property purchases up to £450,000 or access them after the age of 60 for retirement.

But any other withdrawals face a penalty charge equalling £1,250 for every £1,000 bonus – in other words you’ll effectively lose more than you put in.

Some of these rules are thought to be unfair or confusing, so the FTB ISA is expected to differ in several ways:

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Why should homebuyers still open a Lifetime ISA?

Moneybox’s director of personal finance, Brian Byrnes, tells us, “If you expect to buy below the £450,000 price cap, it is well worth considering opening one now rather than waiting for a new first-time buyer product that may not arrive until 2029. Waiting could mean missing years of government bonuses and compound growth.”

For example, if you open a LISA today and pay in the maximum of £4,000 per tax year, you could have over £16,300 by April 2029, including government bonuses and growth at 5 per cent.

Based on what we already know, LISA holders will be allowed to open an FTB ISA but won’t be able to pay into both in the same tax year.

You won’t be able to transfer your Lifetime ISA into an FTB ISA (to avoid double payment of the government bonus), but you’ll be able to use both for your property purchase.

Why should retirement savers still open a Lifetime ISA?

For basic-rate taxpayers, a Lifetime ISA sometimes beats a pension in retirement.

When saving, the 25 per cent government bonus on LISA contributions is equal to basic-rate tax relief on pension contributions. But when you get the money back (after age 55/57 for pensions or age 60 for LISAs), pension withdrawals are partly taxable, while Lifetime ISA withdrawals are entirely tax-free.

Overall, the LISA is better value for money, saving you around £150 per £1,000 withdrawn, compared to a pension lump sum taxed at the basic rate.

Pensions still have some advantages over Lifetime ISAs, of course, including that your employer might pay in too and that the contribution limit is much higher.

So, it’s usually sensible to have both.

A LISA, a SIPP or a privately managed pension plan can all form part of a solid retirement strategy.

Is a Lifetime ISA right for you?

There are a couple of good reasons to skip LISAs for some people.

For example, if you’re a higher-rate or additional-rate taxpayer, the tax relief on your pension contributions will be at least double the government bonus on Lifetime ISA contributions.

And, if you’re planning to buy a property close to the £450,000 cap, a Lifetime ISA will put you at risk of paying the withdrawal penalty charge.

However, your homebuying plans or tax status could change in the future, and it’s only possible to open a Lifetime ISA for a limited time.

Some providers, including Moneybox and Tembo, allow you to do so with just £1. To keep the option to pay in up to £4,000 a year until the age of 50 and get a 25 per cent government bonus, this is a small price to pay for flexibility.

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