4.1 ISAs for your first home or your retirement
There are two other types of ISAs which are important to mention, one of which you can still open, the other which is still running but is shut to new applicants.
LISAs can be opened by anyone aged between 18 and 39, as a means to save for a first home or your retirement, and you can save up to £4,000 per tax year. In addition to tax-free interest, the state will provide a bonus of 25% of the amount you save each year until the age of 50. So it is possible to accumulate bonuses of up to £33,000 by saving the maximum of £4,000 per year and getting a £1,000 (25%) bonus for 33 years.
However, LISAs have strict rules about what you can do with these savings. These can only be used to:
- Help with a first-time property purchase in the UK. The property must be used as a primary residence – and only cost up to £450,000.
- Help build up a fund to provide pension income from the age of 60.
If you withdraw money from your LISA before you’re 60 for anything other than a first-time property purchase, you will incur a 25% penalty on what you withdraw. The only exemption from this charge is if you are terminally ill. So, if you open a LISA, be completely sure that you won’t need the money for any purposes other than to buy your first home or to provide retirement income. But even if you use it for an income in later life, there are risks and you may be better off saving via other means (e.g. maxing employer contributions via a workplace pension), so do some more homework first.
These are no longer available for new applicants, but if you have one already, they can be used towards a first property purchase. The state tops up these cash ISA accounts by 25%, up to a maximum of £3,000.
There are no penalties if you withdraw the money and don’t use it to buy a property, but you will not get the bonus from the state.
Activity 4 Tax breaks for savers
Why is the government incentivising savings via tax breaks and bonuses (on LISAs)?
You saw earlier in this session that the UK has a poor record when it comes to saving.
Households with access to savings can manage mini-crises – for example the need to pay for household repairs or replacement appliances – without resorting to borrowing money, perhaps via expensive methods such as using a credit card.
Additionally, the difficulties that young people have in getting on to the housing ladder is arguably the catalyst for the support now provided by LISAs and, until recently, by the availability of Help-to-buy ISAs.
LISAs can also help those who need to build up their pension funds to sustain them in retirement. Given the shortfall in the funds many people need for their retirement, this support from the government – although not substantial – is helpful. Though as mentioned above, there may be better ways to save for retirement.