Lifetime ISAs have gained popularity, with an additional £732 million being deposited into these accounts last year, according to government data.
Recent data reveals a 43% increase in contributions to Lifetime ISAs in 2022/23. The total savings reached a record £2.4 billion that year, nearly double the amount contributed three years ago. Additionally, the average contribution per account has risen, with more people investing larger sums.
Lifetime ISAs serve a dual purpose: helping people save for their first home or for retirement, with the funds accessible at age 60. An increasing number of account holders are using the funds to buy property, with approximately 57,000 individuals using their Lifetime ISA to purchase a home last year.
On average, people withdrew nearly £15,000 from their accounts to buy homes, up by around £1,000 compared to the previous year. As these accounts mature, it’s natural that savers are accumulating more, allowing them to make larger withdrawals when purchasing a home.
Since the launch of Lifetime ISAs in April 2017, almost 230,000 people have used their accounts to buy property, with over £3 billion withdrawn for first-home purchases. This averages about £13,300 per withdrawal.
REMEMBER THE EXIT PENALTY
However, many savers face penalties for early withdrawals. If funds are withdrawn before age 60 for any purpose other than buying a first home, a 25% government-imposed exit charge applies. This charge not only recovers the government bonus but also reduces the saver’s original contribution.
For example, if you contribute £4,000 to your Lifetime ISA and receive a £1,000 government bonus, bringing the total to £5,000, an unauthorised withdrawal would result in a 25% exit penalty of £1,250. This means you’d only get back £3,750, even though you initially contributed £4,000.
Despite this, more savers are withdrawing funds and facing the penalty, with more than £75 million lost in withdrawal charges last year. This represents a nearly 40% increase from the previous year, and the amount is now 14 times higher than it was in the year after the accounts were introduced.
The average value of these unauthorised withdrawals has remained around £3,000, except for a brief period during the pandemic when the withdrawal charge was temporarily reduced from 25% to 20%. The number of savers making unauthorised withdrawals surged by almost a third last year, affecting about one in eight Lifetime ISA holders.
HOW A LIFETIME ISA CAN ACCELERATE YOUR SAVINGS
If someone had opened a Lifetime ISA in 2017 and contributed the maximum £4,000 each year, their account would now be worth just over £50,000, assuming an average 5% annual investment growth after fees. Over those eight years, the individual would have contributed £32,000, received £8,000 in government bonuses, and earned approximately £10,000 in investment growth.
By comparison, saving the same £4,000 annually in a regular stocks and shares ISA over the same period would result in a pot of about £40,000, assuming the same 5% annual growth. Without the government bonus, you’d miss out on an extra £10,000, showing the significant advantage a Lifetime ISA provides over other savings options.
A Lifetime ISA is designed to help savers save for their first home or retirement. For every £4 you put in, the government adds £1 of free money up to a maximum contribution of £4,000 a year and government bonus of £1,000 a year. You must have had your account opened for at least 12 months before using it to purchase a property if you want to use the government bonus.
You can open one between the ages of 18-39 and continue to contribute until you turn 50. You may face an early access withdrawal charge of 25% if you withdraw from your LISA prior to buying your first home or before age 60.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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