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Five LISA misconceptions debunked

Emma-Lou Montgomery, Fidelity Personal Investing, 23 June 2016

How does a £32,000 tax-free lump sum from the government sound?

While we’re usually told that if something sounds too good to be true, it is, the £32,000 tax-free bonus is theoretically possible to achieve with a Lifetime ISA, or LISA as it’s being called.

But while that much is true, a lot of so-called facts about the LISA ahead of its launch in April 2017 are not all they’re cracked up to be.

Here we debunk five popular misconceptions about the Lifetime ISA.

1. Anyone can open a LISA

I’m afraid not. You have to be between 18 and 39-years-old when you open a LISA. So if you’ve already hit the big four-oh when the LISA launches in April 2017 you’ve already missed the boat.

And going back to that £32,000 tax-free bonus, if you were to open a LISA at the age of 18 and diligently pay in the maximum £4,000 allowed every year until you were 50 (so a not insubstantial £128,000 in total) you would be entitled to claim the full bonus. Also don’t forget the interest or investment growth that will accrue on that money too.

2. A LISA is a no-brainer for anyone who wants to buy a property

If you’re a first-time buyer with even the vaguest of plans to buy a property at some point in the not too distant future, then, yes, but not if you already own a home. Only first-time buyers can use money held in a LISA to buy a property.

You could also find that the £450,000 threshold is a bar when it comes to using the LISA to kick-start your property dreams if you live in a high-cost area. In parts of the country where the average house price is already above the £450,000 threshold you may struggle to find a property to meet your needs, and if property prices continue to rise, that will mean more parts of the UK could become no-go areas for LISA buyers.

3. You can access your money at any time in a LISA

You can, but there are strict rules on when you can access your money and penalties for withdrawing it early.

If you decide to use the ISA to save for a property, you’ll have to hold the ISA for at least 12 months before you can withdraw your money. And if you use it as a pension fund you won’t be able to get your hands on the money until you’re 60. Withdraw it sooner and you’ll lose the bonus and any interest earned on it. Plus you’ll have to pay a 5% fee.

The one exception to the age 60 rule is if you’re diagnosed with a terminal illness. Then you’ll be able to withdraw your money including the bonus.

4. LISAs are a better bet than pensions

The truth is that if you’re in a company pension scheme and get a contribution from your employer into your pension fund, that and the tax relief pensions attract, still makes a traditional pension hard to beat.

Plus from April 2019 the 25% LISA bonus will be blown away by the combination of the employer contribution plus the tax benefits on a pension, which will deliver a return of 70% on a net contribution for a basic rate taxpayer under automatic enrolment.

Even if you don’t receive employer contributions, as a higher rate tax payer a pension or SIPP still tends to be a better choice.

A pension also trumps a LISA in the majority of cases if your company pension scheme gives you the option to sacrifice salary for pension contributions.

5. You can use a LISA to buy a property OR save for retirement; not both

This is a myth. If you use the money in your LISA to buy a property then the money in your LISA will be sent directly to your solicitor or conveyancer. Should the purchase fall through for whatever reason, the money will simply be transferred back into your LISA. And that won’t have any impact on the contributions you make into the LISA in that tax year. That’s because you can (and the government hopes you will) keep paying into the LISA for your retirement as well, once you’ve bought your first home.

In much the same way, a LISA doesn’t exclude you from having a regular ISA. The annual limit is being raised to £20,000 from April 2017, which means you can have both as long as your total contributions do not exceed £20,000 in that tax year. So maximise your savings by topping up your stocks & shares ISA each year too.

It’s important to remember that you can also transfer £4,000 from other ISAs into the Lifetime ISA in each tax year. And like with any other ISA transfer, anything you've transferred from an ISA from a previous year will not affect the contributions you can make in the current tax year.

Important information

The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. Eligibility to invest into an ISA or pension and the value of tax savings depends on personal circumstances and all tax rules may change. This information is based on our understanding of the proposed LISA rules which may be subject to change later this year. With pensions you will not be able to withdraw money until you reach age 55. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Fidelity Personal Investing does not give investment advice. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.

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