As well as whopping deposits to save for, the under 40s also need to put money aside for retirement, which means that there is a financial mountain to climb.
So, it is good to know that the government is prepared to provide a much-needed financial bonus for anyone aged 18-39 able to invest for the future through a LISA.
The LISA replaces the Help to Buy ISA, which ended for new applicants at the end of November 2019, and it offers significant rewards.
For every pound you invest in your LISA, the government adds a 25% bonus. Yes, 25%, and that is each year, up to a maximum of £1,000 and until you are 50. The reason the upper limit is £1,000 is because you can only invest up to £4,000 in a LISA each tax year.
The eagle-eyed amongst you will have spotted that the contribution allowance is different to ordinary ISAs, which currently allows you to invest up to £20,000 tax-free each year. Happily, the LISA can be combined with other ISAs as part of your overall tax-free allowance.
More good news – as the LISA is a personal allowance, if you are planning to buy your first home with someone else, they too can hold a LISA if they open one before they reach 40 years of age.
If that’s the icing on the cake then the cherry on top is that when you buy your first home, you can keep your LISA and top it up until 50 as a retirement nest egg.
Let’s say you set up a regular monthly investment of £300 into your LISA. The government will pay in a £75 into your account, each month. And although you must be under 40 to open one, you can keep investing in it until you are 50-years old.
So, as things stand, if you invest the maximum LISA allowance each year from 18-years-old, that adds up to a free cash boost of £32,000.
Adding to that, any gains your investments make in a LISA are tax-free. No, the past does not guarantee of future behaviour, but it is useful to know that, according to the Barclays Equity Gilt Study 2019, over the last 118 years UK equities returned 5.1 per cent on average per year whilst cash returned only 0.7 per cent(2).
As you’ve probably guessed, the government’s generosity does come with strings attached. The LISA is designed for the under 40s aiming to buy their first home or save for their retirement.
For home buyers, the maximum value of your first home cannot exceed £450,000. You cannot have owned a property previously and you must have made your first contribution at least 12 months prior to accessing it for a house purchase.
For those of you looking to use a LISA to boost your pension pot, you will not be able to access the funds until you are 60 years old.
Usually, if you don’t comply, you’ll incur a 25% penalty, meaning you’ll not only lose the bonus, but could get back less than you initially invested. Should you become seriously ill, and have less than 12 months to live, you can withdraw and retain the bonus without penalty.
If you are planning to buy your first home
If you are looking to invest in stocks and shares, it is best not to think of your LISA as a short-term solution as markets fall as well as rise.
But if you are planning to buy your first home in a few years, you have time on your side and the LISA’s 25% bonus is a boon - £1,000 free cash each year is not to be sniffed at.
If you are planning your retirement
As your retirement is some way off, a LISA gives you a chance to invest and take risks in the hope of making greater gains than cash savings could. You can invest based on your attitude to risk and choose a fund that is right for you. View our funds to get you started list.
But it is good to understand what other options are open to you, e.g. company pensions or a SIPP if you are self-employed or a company director.
A LISA can complement other pensions and again, a £1,000 a year bonus could go a long way to adding to the overall value of your investments.
(2) Financial Times