How LISA offers free money to boost pay

Individual Savings Accounts (ISAs) are a tax efficient way of saving. You can now invest up-to £20,000 each tax year with regular contributions or lump sum payments and access your money whenever you wish. Any growth (capital gain), is tax free. That’s why around 10 million adults in the UK put an average of £5,500 into an ISA each year. 

The Lifetime ISA (LISA) became available in April 2017. People who are under the age of 40 can open a LISA and save up to £4,000 per year. The Government will then top this amount up by 25%. This means that for people who save the maximum each year, the Government will give you £1,000 each year, free of tax.  You can open one if you’re between 18 and 39 years old and continue paying in and getting the 25% top up until age 50.  

A LISA is a flexible way to save and invest for your first home or later life. LISA funds can be put toward a deposit for a home that is worth a maximum of £450,000 in all areas of the UK or taken at age 60 to be used as retirement income. Be warned, if you want to take money out before you're 60 and you aren't buying your first home, there's usually a 25% Government charge.

Lifetime ISAs, as with any ISA, can only be assigned to one person, but a couple buying their first home can combine their LISAs and bonus. The £4,000 LISA can make up part of your £20,000 annual allowance, but you only get the 25% bonus on the first £4,000. The Government bonus doesn’t count towards your £20,000 annual limit or the £4,000 annual LISA limit.

If you maxed out the LISA opportunity and started investing from age 18 to 50 the Government bonus is worth £32,000, plus any growth from investment. As with other ISAs, you can choose to save in cash or invest in the stock market through stocks and shares ISAs. Adding in the potential benefit of compound interest these amounts accumulated can be quite material.

For example, the £32,000 Government bonus could amount to £47,000 based on a 5% annual growth rate which is fairly typical of a stocks & shares ISA over the longer term. However, you also need to consider the risk that investments can go down as well as up and you may get back less than you put in.

A LISA can be part of a workplace ISA, facilitating contributions via payroll deduction and with the option for employers to make contributions on behalf of employees, often done by diverting part of an employer funded pension contribution.

With millennials predicted to make up 50% of the workforce by 2020 and 75% by 2025, any assistance in helping them get on the property ladder is likely to be well received. With a £1,000 pa tax free bonus on offer from the Government, a LISA, or a workplace LISA, seems like a great option as an engaging employee benefit.

But as with the launch of any new financial product, you should have a clear communication strategy to ensure your employees understand all the implications of taking out a LISA especially the tax implications of withdrawing funds early and the limits on the value of properties they can purchase.

Article by

Phil Hollingdale, Co-Founder of Cushon.