One in four UK adults have never heard of a Lifetime ISA (LISA), yet it could be a valuable retirement tool.
There is a big gap in knowledge around Lifetime ISAs, with one in five adults aged between 18 and 34 admitting they were unsure of how they work and 20% didn’t know what they were.
LISAs can be used for buying a first home or for a retirement pot with the government automatically topping up anything put into one by 25%, to a maximum joint contribution of £5,000 a year. This means if someone put £4,000 away in a tax year, they would essentially be given £1,000 by the government.
See YourMoney.com’s Lifetime ISA guide for more information on the pension and property hybrid scheme.
Nearly a third (27%) of adults in this age group said they would use a LISA alongside a pension for their retirement while 15% said they would use it instead.
Just 10% of those in this age group said a LISA wouldn’t suit them, according to the research from Hargreaves Lansdown.
Low awareness of LISAs
One in five 18-34-year-olds told the investment firm they didn’t know what a LISA was, but this figure rises to one in four for all age groups.
LISAs can’t be opened by anyone aged 40 or over. They can also only be used for two reasons (buying a property or for retirement). If the money is withdrawn for any other reason, a 25% penalty is placed on the entire amount withdrawn.
The investment group is calling on the government to increase the age to 55 for those who can open a LISA. It said its poll of 2,000 people showed that 40% of those aged 18 to 34 said LISAs have a place in retirement planning.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “There is also more that needs to be done to help people get the most from their LISA.
“As it currently stands people over the age of 40 cannot open a LISA and this really limits the options for people over this age who don’t feel like a pension is the right retirement vehicle for them.”
Previously calls have been made to reform the LISA following a rise in the number of withdrawal penalties charged.
Benefits for self-employed workers
Specific groups, such as the self-employed, could also benefit from the extra government top-up as they generally can’t access workplace pensions.
These workers also have the flexibility of being able to access the money before retirement in emergencies, subject to the 25% penalty, if they need to, unlike with pensions.
The investment group is also calling for the penalty to be lowered to 20% as it said it can act as a disincentive to savers.
Morrissey added: “For groups such as the self-employed who don’t benefit from workplace pensions, LISAs can help them build up a retirement pot that they can access early in case of emergencies subject to a 25% penalty.
“This is particularly the case for those paying basic rate tax as the 25% bonus acts in a similar way to basic rate tax relief in a pension – and the income is all tax-free. Higher rate taxpayers are usually better off in a pension where they can get 40% or even 45% tax relief on their contributions.”
