I’ve had a lifelong Issa (Lisa) for the past five years, as I’ve been keeping a deposit on a house.
During this time I have saved £12,000, which is boosted to £15,000 when HMRC contributions are taken into account.
Along with my partner, we have now received an offer accepted on a property. This property would be my first home, but my partner previously owned one.
As my partner had previously owned a property, we are fortunate that he contributes a large deposit. We are jointly buying a home for just over the £450,000 mark.
Watch out: when using Lisa, whether buying individually or as a couple, the property value must not exceed £450,000
As you know, the fact that the house costs over £450,000 means I am unable to access Lisa’s HMRC bonus.
It’s unfortunate, but I accept that these are the rules. However, I am very disappointed that, in addition to withdrawing the bonus, my Lisa provider also took over £750 of my money as a penalty.
I feel it would have been okay if they took the interest out of my account, but to punish me by taking my own money that I saved is very painful.
Is this something any other readers have encountered, and if so, is there anything I can do? By email.
Ed Magnus of This is Money replies: This is undoubtedly a common puzzle. There will be a lot of savings towards their first home using Lisa.
Once you open it, the government will collect £1 for every £4 you save, giving you a £1,000 bonus with a maximum of £4,000 a year you can put away. Basically, it’s free money.
However, unfortunately, Lisa can come back to bite you because there are also some very strict rules to adhere to that could cost you dearly.
The money saved can only be used for the first home, which must cost less than £450,000, or for retirement – and those who break the rules will be subject to a 25 per cent penalty on the amount withdrawn.
The key point here is that the penalty applies to the total amount of money withdrawn, not the total amount of money added.
So in our reader’s case, that means the total money they put into Lisa, plus the government bonus, plus any interest accrued during that time.
As our reader hints, one of the key rules is the fact that Lisa can only be used on the first home if the property is priced at £450,000 or less.
Our reader has accumulated £15,000 in Lisa’s account: £12,000 of money they put in plus interest, and £3,000 added by the government.
A fine of 25 per cent on £15,000 equates to £3,750, which means they lose £750 more than the £3,000 the government added at 25 per cent.
A spokesperson for the savings website Savings Guru said: ‘This is not the decision of the Lisa provider, it is the government’s.
The reader’s wrath should be directed at the government, on this occasion, not Lisa’s butler
Cash Isas are created with a penalty fee of 25 percent, if savers break it. This is to cover the bonus but it is for the full amount so that the savers lose out if they break it
For example, the saver getting £1,000 gets a bonus of £250, but if it breaks, the 25 per cent penalty is on £1,250, not £1,000, so the saver gets back £987.50 – that’s £1,250 £312.50 minus £312.50 fine fine.
The government has reduced this during Covid to 20 per cent but has brought it back up again. The reader’s ire should be directed at the government, on this occasion, and not the service provider.
Boost: savers under the age of 40 can open an ISA for life and get a 25% government bonus
How does Lisa work?
Anyone between the ages of 18 and 39 can unlock Lisa and can add to it until they reach the age of 50.
Once people reach the age of 50, they will not be able to pay or receive the 25 percent bonus. However, their account will remain open and their savings will still earn interest or investment returns.
It can also be used as part of Issei’s annual personal allowance of £20,000 and as with a standard Issas, they can either choose to save or invest their money via Lisa.
Two people who buy together can use their Lisa to deposit.
It can also be used to buy with someone who isn’t a first time buyer, although they obviously can’t use a lifetime ISA if they have one.
The money in Lisa can either be used for a first home deposit or can be withdrawn from age 60 to help fund retirement. I can’t use anything else.
People can pay up to £4,000 per annum and the government will add a 25 per cent bonus to your savings, up to a maximum of £1,000 per annum.
This means that for every £4 saved, the government will add £1 up to a maximum of £1,000 each tax year until the person turns 50.
What to watch out for
When using a Lifetime Isa to purchase a home, it is essential that people are aware of the limitations that could render the bonus void.
Firstly, as previously mentioned, whether it is a single or a couple purchase, the value of the property must not exceed £450,000.
They must be a first time buyer to be able to use Isa for life in purchasing a property.
This means that they cannot previously own property in the UK or anywhere else in the UK. It should be noted that the property they are buying must also be in the UK.
Savings: The Lifetime Isa, a tax-exempt savings account for people ages 18-39, launched in 2017 to encourage young adults to save for their first home or retirement
They must also purchase a home in which they plan to live. The scheme is not for those buying a buy-to-let home or a holiday home.
They will have to use a typical payment mortgage where they will pay back a portion of the loan, plus the interest, each month until they finally pay off the mortgage.
They cannot, for example, use an interest-only mortgage, where they only pay the interest each month, with the loan amount remaining the same.
Finally, the Lisa cannot be used on any home purchase made within 12 months of being opened.
How to withdraw money to deposit a house
When purchasing a property, it is essential that the account holder does not simply withdraw funds, as this will result in penalty fees being charged.
Instead, they must apply to the Lisa provider in order to have the money sent to the attorney who handles the purchase.
Wrong: Lisa savers shouldn’t simply withdraw their money to pay the house deposit, because that would mean they incur a penalty. Instead, they must submit an application to their provider
Money can be used for deposit when contracts are exchanged and before they are completed, although there can be no delay longer than 90 days between them.
If he signs the sale through the attorney, he’ll be able to return the money and reward to Lisa – though it has to be the same amount.
What are the best Lisa Cash rates?
For anyone saving to buy a property within the next five years, keeping cash in savings rather than investing makes sense as this will avoid any short-term downturns in the stock market.
Lisa’s rates aren’t as competitive as other savings deals, but a government top-up means that as long as she’s comfortable with Lisa’s rules, she’ll be the best savings vehicle for maximizing returns.
The best cash deal through Lisa is currently offered by Moneybox with a 2 percent payment, albeit that rate includes a flat 0.2 percent bonus for the first year.
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