Is the lifetime ISA for you?

The government is rolling out a new type of ISA from this April, aimed at supporting people buying a house or saving for retirement – but is it a good option?

Buying a house and building your pension are arguably the two biggest financial challenges of the modern era. With house prices having shot up over the last two decades, getting on the property ladder is a real challenge for first time buyers, while further on in life, achieving a comfortable retirement is becoming even more difficult.

Before Brexit and the great political shake-up within the Government, last April the now ex-Chancellor George Osborne unveiled his latest idea to address these concerns. The Lifetime ISA was born, and from this April people will be able to start using it to save for the future.

What is the Lifetime ISA?

If you’re aged between 18 and 39, the Lifetime ISA will allow you to save up to £4,000 a year tax-free and receive a government bonus worth 25% of your contribution – up to £1,000 a year – until you reach 50. Lifetime ISA savings can be used to buy a first home, or accessed from the age of 60 to help fund your retirement. In the unfortunate event that a terminal illness strikes, you can also use the savings to support you.

Let’s say you’re 29 and save up £4,000 a year in a Lifetime ISA for the next 20 years; when you reach 49, you’ll have saved £80,000 yourself – with the government contributing a further £20,000 on top. Any growth your £100,000 pot of money achieves will be completely tax-free, and this approach could go a long way to funding your desired retirement lifestyle.

What’s the catch?

There are a few, and it’s very important to be aware of what they are before committing down this route.

Firstly, if you’re using a Lifetime ISA to save for retirement instead of a workplace pension, you’ll miss out on employer pension contributions. If you are paying a sizeable part of your salary into a pension and your employer is matching it, this could work out better than the government’s 25% bonus paid in the Lifetime ISA.

And then there are the exit penalties. If you need to use your Lifetime ISA before you reach the age of 60 other than to buy a first home or to fund retirement, you’ll lose 25% of your savings. And 25% isn’t just the government bonus you’ve received, it can be applied to any growth your savings have achieved.

Finally, on using the Lifetime ISA to buy a first home, you can only use it for a property worth up to £450,000. That might sound like a lot, but May 2016 research by Emoov suggests the average UK home could reach £457,433 by 2030. And within areas like London and the South East, this average could prove to be significantly higher.

What should you do?

There is no doubt that the tax incentives offered by Lifetime ISAs make them an attractive option. This approach to saving for the future could be right for many people, but on its own it might not offer the full solution.

Certainly – when it comes to retirement – it might not be time to abandon saving into a pension all together. As with all long-term financial planning, it can really make a difference to sit down with a financial adviser and discuss your options. They can help you to devise a strategy that’s right for your situation and ambitions, including making the most of the tax planning opportunities that are available to you.