In our Budgeting Clinic series, Tom Francis, head of personal finance at Octopus Money, answers your questions about all things personal finance. Tom is a fully qualified and chartered financial planner. Worried about how your savings are shaping up for the future, or need a plan for how to get out of debt? Drop him an email at money@theipaper.com.
Question: I’m 29, live in London and earn about £47,000 a year. I’ve managed to save around £15,000 so far, mostly in a standard savings account earning about 3.5 per cent interest. A few friends have told me I should open a Lifetime ISA (LISA) now while I still can, especially with all the talk of the rules changing. I understand there’s a 25 per cent government bonus, but I’m confused about whether that really makes it a no-brainer. My worry is that if I do eventually buy in London, the property could end up costing more than the current £450,000 limit, in which case I’m not sure whether I’d be boxing myself in.
Answer: First up, I completely understand why this feels confusing. A LISA is often presented as an obvious next step for people in their twenties and thirties, especially when there is a deadline or possible rule change in the background. But with money, the products that get talked about most loudly are not always the ones that suit your situation best. The right answer here depends less on the headline bonus and more on what you are actually likely to use the money for.
At a high level, there are really three relevant homes for your savings. A cash ISA is about protecting interest from tax while keeping your money relatively stable and accessible. A stocks and shares ISA gives you the same tax shelter, but your money is invested, so the value can rise and fall. Then there is the LISA, which is a more specialised wrapper designed mainly to help people either buy their first home or save for later life. You can open one if you are aged 18 to 39, put in up to £4,000 a year, and the Government adds a 25 per cent bonus.
The reason people talk about LISA’s so enthusiastically is that the bonus is hard to ignore. On £4,000, a LISA gives you an immediate £1,000 uplift. By comparison, £4,000 sitting in a savings account earning 3.5 per cent would make roughly £140 over a year. On your full £15,000, 3.5 per cent interest would be about £525 over a year. So purely on headline numbers, the LISA bonus is much more generous than ordinary savings interest. That is the part your friends are reacting to, and they are not wrong to notice it.
But bonuses never come free of conditions, and that is the bit that matters most in your situation.
A LISA is not just a more generous savings account. It is a savings account with strings attached. Under the current rules, you can use it without penalty for a first home purchase only if the property costs £450,000 or less, the purchase is funded with a mortgage, the property will be your main residence, and it has been at least 12 months since your first payment into the account. If you withdraw for another reason before age 60, you pay a 25 per cent withdrawal charge, which means you lose the bonus and a little of anything you have earned on your savings, too.
That is what makes this not quite straightforward for you.
You live in London, you are not yet sure when or where you will buy, and you are rightly aware that a first property there could easily push above the current £450,000 cap. If that happens, money inside a LISA becomes much less flexible. So I would not look at this as a simple question of whether to grab the bonus while you can. I would look at it as how much optionality you are willing to give up in exchange for that bonus.
There is another layer here, too. The Government has said it plans to consult on a new first-time-buyer-only product, but it has also said it will remain possible to open a LISA until that replacement becomes available, and existing account holders will be able to continue saving under the current rules indefinitely. That means there is some reason to pay attention, but not a reason to panic. Headlines often make these decisions feel more urgent than they really are.
If you were certain that you wanted to buy a qualifying first home within the next few years, then a Cash LISA would be the more natural fit than a stocks and shares LISA. That is because money for a house deposit usually needs stability more than risk. If your timeline is only a few years, investing that deposit money in the market can create the exact kind of uncertainty you do not want just before a purchase.
Where I would be more cautious is with the idea of moving a large chunk of the £15,000 across, simply because the new tax year is coming up. You have done a good job building your savings, and some of that money is probably doing a different job for you. Part of it may be a future deposit. Part of it may be your financial buffer. Part of it may simply be there because your life plans are not fully settled yet. It is easy to look at a wrapper and think the whole point is to maximise it. In reality, the point is to match the wrapper to the purpose.
So the middle ground may be the best answer here.
If keeping the option open matters to you, opening a LISA now with a modest amount could be sensible. It starts the 12-month clock for a future house purchase and gives you access to the wrapper without forcing you to commit all of your spare cash immediately. Then you can keep the rest of your savings more flexible, either in your existing savings account or in a cash ISA, while your plans become clearer.
I would also remember that you already have one long-term wrapper in place, your workplace pension. For most employed people, especially where there is an employer contribution involved, that remains an important foundation for later life. The LISA can be useful, but it does not need to do every job at once.
So, should you open one? Potentially, yes. Should you treat it as an automatic home for all your spare cash? I don’t think so.
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