Personal finance experts are urging individuals under 40 to take advantage of the Lifetime ISA (LISA) before it’s too late. With eligibility ending on your 40th birthday, now is the time to secure a government bonus of up to £11,000.
According to The Northern Echo, those approaching this milestone need to act quickly, as the clock is ticking. The Lifetime ISA offers significant long-term benefits for both first-time homebuyers and those looking to boost their retirement savings, making it an opportunity too good to miss.
What Is a Lifetime ISA and How Does It Work?
The Lifetime ISA allows savers to contribute up to £4,000 each year and receive a 25% government bonus. This means that, over time, the government could add up to £1,000 to your savings annually. Contributions are allowed until the age of 50, and the funds can be used to either buy a first home or save for retirement.
For individuals approaching 40, the LISA presents an excellent opportunity to build up savings with the benefit of tax-free growth. As long as the funds are left untouched until age 60, you can withdraw the money completely tax-free. This makes it a strong financial tool for both those planning to buy their first home and those looking to build a retirement fund.
Amy Knight’s Warning
Amy Knight from NerdWallet UK emphasised the urgency, stating,
Eligibility to open a LISA stops on your 40th birthday, so it’s imperative for people approaching the big 4-0 to act fast.
This is a key reminder for those nearing 40 to make the most of this opportunity before it expires. She continued,
The end of the 2024/25 tax year is rushing towards us: There’s just one month to go to make contributions to a LISA this year and claim up to £1000 from the government.
What Happens if You Withdraw Early?
From the age of 60, you can withdraw cash from your LISA completely tax-free, either as a lump sum to kick-start your retirement or in small amounts to top up your state pension and any other pension income. Knight also highlighted that,
If you plan to continue working or run your own business later in life, your LISA can be left to continue growing. An independent financial adviser can help you plan what to withdraw and when
By acting before turning 40, individuals can ensure they take full advantage of the government’s contribution to their savings, setting themselves up for a more secure financial future.
It’s important to note that withdrawing money from the LISA before age 60 for reasons other than purchasing a first home or retirement will result in a 25% withdrawal penalty. This means that savers could lose some of their original contributions, making it crucial to plan withdrawals carefully.
How the Government Bonus Adds Up
A person aged 39 could open a LISA and contribute the maximum amount of £4,000 each year until age 50. Over the course of 11 years, they would contribute £44,000, while the government would add £11,000 in bonuses.
Assuming the account grows at a rate of 5% annually, this could grow to over £125,000 by the time the individual reaches 67, providing a substantial retirement fund. Amy Knight further explained,
Someone aged 39 who opened a LISA now could contribute £4,000 per year until they reach age 50 when the option to pay in stops.
Over 11 tax years, the saver would contribute £44,000 and the government would add an extra £11,000.
Left untouched until age 67, that £55,000 LISA pot could grow at 5% per year to more than £125,000, thanks to the magic of compound interest.
A Useful Tool for Contractors and Self-Employed Individuals
For contractors and self-employed individuals, the LISA offers a chance to build a private pension fund quickly, especially if they’ve missed out on employer pension schemes. This can provide more financial security and independence in later years.
Financial advisors can assist in planning withdrawals to optimise the benefits of the LISA.
As Amy Knight noted,
Given rising living costs, the state pension already falls short of the income required for a dignified retirement. For contractors and self-employed individuals who’ve missed out on employer pension schemes, a LISA can help you build a private pension pot quickly to enjoy more financial security and freedom in later life.
