Could a Lifetime ISA be your best bet for savings if you’re under 40?


Rory Brand

Rory Brand

Financial Planner


Under 40 and want £33,000? Yeah, me too! So, how do I get a piece of the action?

Well, it’s not just ‘Bob’s your uncle’ and away you go whistling a merry tune with a pocket full of cash, but I suspect you weren’t expecting it to be.

Heard of ISAs? Of course you have. Heard of Lifetime ISAs? I hear you say, “The House ISA?”. Well yes, that one, but they do something else too.

Lifetime ISAs don’t need to be only used to buy your first home; they can also be used to save for the long term too. But, unlike pensions, your money is not tied away, you still have access to it.

A pension may be your big hitter when it comes to the financial planning toolkit, but they have one really big downside. And the younger you are, the worse it is.

This is why - you can’t access your pension before pensionable age, unless you’re seriously ill, and this barrier can be way too big for most to make sizeable contributions when they are younger.

Pensionable age is changing to be 10 years prior to state pension age, and this makes it a moving target. The pessimist/cynic in me says that the goal posts are likely to move several times before I get there. Currently, a 55-year-old can access their pensions today, from 2028 it will be 57 and we know with the state pension changing to 68, pensionable age will become 58. Generally, it is expected that this will continue to increase as pension legislation is reviewed.  

When starting out, maybe with a young family, there are always lots of money unknowns. How much will I need for the kids? Is the house right for us long term? Do we move? Do we extend? We need to replace a car, we are getting married, we had kids and nurseries cost how much???! (Free childcare in Scotland really needs a new name…)

The period of life, where you maybe have a bit of savings but lots of expenditure that may come your way, can make it very hard to commit money for what might be 25 years in a pension pot, even if the tax relief is attractive.

Don’t get me wrong, you should have a pension and be making the most of it based on your circumstances, but I see Lifetime ISAs as a solid way of getting a bonus of 25% (the equivalent of what a Basic Rate Taxpayer gets) whilst knowing if your other savings won’t cover all the costs that might come your way, you can access it subject to a 25% penalty.

A penalty is not ideal, but it is better than just being told no and the penalty is just on the withdrawal.

So, for the under 40s, if you don’t have a Lifetime ISA, consider getting one. For the over 40s, if you didn’t jump on the Lifetime ISA bandwagon already, you are… erm, well how do I put this nicely, too old. That’s the Government saying that, not me. If you are over 50, sorry, again, not me but you’ve missed the bus on this one.   

So the £33,000… well, you can open a Lifetime ISA from age 18 and contribute to it until you are 50 (unless you're born on 6 April, when the max is £32,000). If you add £4,000 a year, the Government will add a bonus of 25%, topping you up with an extra £1,000 a year. ISAs grow tax free, just like a pension, however once you are 60 years old, all proceeds from your Lifetime ISA are tax free, unlike a pension.

Pensions are great but when you are younger, they can be very difficult to commit to so consider a Lifetime ISA to compliment your long-term savings, it could be worth £33,000 from the Government.

Get in touch

If you would like to discuss this further, please don't hesitate to get in touch with myself, a member of our Wealth team or your usual adviser.

 

Disclaimer: Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority.

This communication is intended to provide a general review of certain topics and its purpose is to inform but not to recommend or support any specific investment or course of action.

This communication is based on our understanding of tax legislation as at 06/06/22. The value or benefit of any specific tax reliefs or allowances will depend upon your own situation.