Lifetime ISA (LISA) – what they are, what they do and who offers them

Lifetime ISA accounts (LISAs) were introduced in 2016, but have not hugely taken off in popularity with workplace pension providers. Currently only three pension providers offer this product alongside their workplace pension offering.

Our latest insight article looks at Lifetime ISAs, what they are, what products providers offer, and how members can make contributions.

Introduced in the 2016 Budget, LISAs are the latest form of tax-efficient savings account introduced by the UK Government to boost saving.

Savers with a LISA account are able to save up to £4,000 every year without having to pay tax on any interest earned and just like other forms of ISA account, LISA savers can choose between a Cash or and Investment option.

On top of the tax-break, LISA savers also receive a 25% bonus on top of what they save from the state. The bonus is paid monthly and takes between four and nine weeks to arrive. It is only paid on contributions, not on any cash interest of investment growth. It is then counted along with the rest of the savings towards interest or investment growth/loss.

The bonus from the Government is capped at £33,000 and a LISA account can be opened by anyone between the ages of 18 and 39.

It is possible to transfer a LISA account to a new provider, but not possible to have more than one open account. However, it is possible to have a LISA account alongside other forms of ISA accounts.

However, LISA accounts have not proven as popular as the Government had hoped, potentially due to the restrictions on what the savings held in these accounts can be used for.

Our data shows that currently only three workplace pension providers offer a LISA account to their members. These are Cushon, Hargreaves Lansdown and Standard Life (which includes their GFRP and DC Master Trust).

Cushon and Hargreaves Lansdown offer their own products, whereas Standard Life have partnered with Cushon to offer theirs.

Under the rules set by the Government, LISA savings can only be used for buying your first property or for retirement.

Any funds withdrawn for any other purpose are subject to a 25% exit penalty. However, you do not have to pay this withdrawal charge if you die or are terminally ill.

There are also additional rules around buying property. The property must cost £450,000 or less, you must buy the property at least 12 months after you make your first payment into the LISA, you must buy with a mortgage, and you have to use a conveyancer or solicitor to act for you in the purchase.

Those looking to use LISA funds to finance their retirement will also face the withdrawal charge if they withdraw money to transfer the funds to another form of ISA account before they turn 60.

Out of the three workplace pension providers who currently offer a LISA account alongside their pension offering, only Cushon and Standard Life enable contributions to be made at source via a payroll deduction. Our own view is that this would be the optimal way of making contributions, however; all three providers do allow members to make additional payments when wanted in a variety of ways.

Standard Life also enable members to save into a LISA via algorithm based prediction savings. This is where AI or machine learning is used to understand an amount which can be saved based on previous spending and saving behavior.

Currently no workplace pension provider allows contributions to be made via the rounding up or sweeping of surplus income methods, which are now far more popular with the banks.

Cushon on the other hand is the only provider to allow contributions and/or additional payments to be made by the employer into a LISA account.

All three providers offer members the option to apply a contribution holiday, meaning the member can stop/pause savings during times of difficulty or in months with abnormally high spending. This is a very welcomed feature and potentially never needed more so as we are all feeling the pinch of the cost-of-living crisis.

Cushon and Standard Life will also accept a transfer into a LISA account from another ISA. They are both able to do this via an automated process. Hargreaves Lansdown’s LISA account does not currently accept transfers from another ISA.

Over the course of the next two weeks we will look at what over savings vehicles providers are offering along with their workplace pension – this will include Cash and Investment ISAs, Guaranteed Investment Accounts (GIAs) and cash deposit accounts.