The LISA allows people to save up to £4,000 a year and receive a 25 per cent top-up from the Government, but a new report from the Treasury Committee said the Government should consider whether it “has a future in its present form.”
Doing so for another reason results in a 25 per cent charge on the whole sum, meaning savers lose some of their own money as well as the government bonus.
A LISA is designed to help people save for their first home or for retirement.
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Your savings get interest or can be invested in stocks and shares, and the government adds 25 per cent to the total you amass, up to a maximum of £1,000 annually.
If you withdraw for other reasons, you get hit with a penalty of 25 per cent, but this can amount to more than you put in.
Saving for retirement? Your workplace pension could be better
Though a LISA comes with a Government bonus and several tax benefits, experts say that for most people, it’s better to make the most of your workplace pension scheme if you are employed, instead of prioritising a LISA.
Everyone aged 22 to 66 and earning at least £10,000 per year is automatically enrolled into a workplace pension.
The payments into the pension are also not subject to income tax or national insurance (NI) unlike payments into LISAs, which are made post-tax, though when you withdraw from a LISA, you won’t pay tax on the cash, whereas with a pension you will.
He said the situation may be less clear cut for those who are self-employed, and therefore don’t benefit from employer contributions into their pension, and those who are already using their workplace pension to its full potential.
He pointed out that pensions can be accessed earlier – at 55 rather than 60 – and that investment options are likely to be quite limited with a LISA compared with many pension products.
Rachael Griffin, tax and financial planning expert at Quilter, said: “Although you lose the 25 per cent bonus if you withdraw early, the money is still available and that can act as a lifeline if income suddenly dries up, which isn’t the case with pensions.
Saving for your first home? Be aware of the possible penalty
The bonus that LISAs offer for those buying their first home can offer significant help to those purchasing, in the form of the 25 per cent bonus.
According to analysis from AJ Bell, in numerous areas average flats and terraced houses – the sorts of properties that might well appeal to aspiring homeowners – now exceed the £450,000 cap.
“But for anyone unsure about their plans, for instance, if you might buy with someone who already owns, or you’re at risk of breaching the house price cap, then the product becomes a lot riskier. For those uncertain about whether they’ll use it for a property purchase, regular cash or stocks and shares ISA offers far more flexibility and won’t punish you for changing your plans.”
Tom Selby, director of public policy at investment platform AJ Bell said: “Raising the property purchase price limit, which has remained fixed since the LISA was introduced, would be an obvious way to help first-time buyers, who in some parts of the country face a decision between buying a cheaper home outside the area they really want to live in, or saving without the help of a LISA.”
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