LISA Query

[Dicky99]

If my nephew invests his £4k per year in funds within a LISA, let's say for 5 years, and it grows very nicely but after 5 years he decides to draw the money for something other than a house. Is he charged 25% of the total amount withdrawn from his LISA or 25% of 5 x £5k.
I'm wanting to establish if its still a worthwhile option to subscribe to a LISA even if he's unsure about how he might want to use money.

[Urbandreamer]

If my nephew invests his £4k per year in funds within a LISA, let's say for 5 years, and it grows very nicely but after 5 years he decides to draw the money for something other than a house. Is he charged 25% of the total amount withdrawn from his LISA or 25% of 5 x £5k.
I'm wanting to establish if its still a worthwhile option to subscribe to a LISA even if he's unsure about how he might want to use money.

Assuming that your nephew is not of "retirement age" in 5 years time, you have the right of it.
A 25% charge on the total.

I suspect that some confusion is due to percentages and when they are applied.
Invest £80 in a LISA and the government effectively tops it up by £20, or 25% applied at the end.
Put £80 in a pension and it's topped up by £20 at the start. The 20% tax you were charged.
The figures are the same but in one case the £20 is 25% of £80, the other 20% of £100.

If you fail to comply with the rules, ie contribute £4k to a pension as a non tax payer, then the tax rebate on the excess is reversed. Hence the £20 per £80 and it's interest (if any) removed.
Likewise to a LISA.

Dare I suggest £2k to a LISA and £2k to a standard ISA?
Pensions are also not to be disregarded. Currently you can access pension funds before LISA funds, without paying a penalty, though you can't use them earlier to buy a house.

[uspaul666]

If you put in £80, you get an extra £20. If you take it out early, you lose £25.

[Dicky99]

If you put in £80, you get an extra £20. If you take it out early, you lose £25.

I think my question demonstrates an understanding of that. The question is if someone invests the £80+£20 in a fund which does well and they subsequently cash out £120, but not to purchase a house, are they charged 25% of £100 or 25% of £120

[DrFfybes]

I think my question demonstrates an understanding of that. The question is if someone invests the £80+£20 in a fund which does well and they subsequently cash out £120, but not to purchase a house, are they charged 25% of £100 or 25% of £120

The 'tax' is 25% of the amount you withdraw.

Same as a SIPP - it doesn't matter how much you put in (within the LTA), you can get 25% tax free of the amount you crystallise.

[moorfield]

If my nephew invests his £4k per year in funds within a LISA, let's say for 5 years, and it grows very nicely but after 5 years he decides to draw the money for something other than a house. Is he charged 25% of the total amount withdrawn from his LISA or 25% of 5 x £5k.
I'm wanting to establish if its still a worthwhile option to subscribe to a LISA even if he's unsure about how he might want to use money.

A few savvy students (and their parents) are doing. It's worthwhile but only if you can grow your investment well over that period.

[Dicky99]

I think my question demonstrates an understanding of that. The question is if someone invests the £80+£20 in a fund which does well and they subsequently cash out £120, but not to purchase a house, are they charged 25% of £100 or 25% of £120

The 'tax' is 25% of the amount you withdraw.

Same as a SIPP - it doesn't matter how much you put in (within the LTA), you can get 25% tax free of the amount you crystallise.

That clarifies thanks

[Maroochydore]

It's worthwhile but only if you can grow your investment well over that period.

Not relevant to the OP but I'm not sure what you would define as "grow your investment well".

My daughter took out at Cash LISA when she was 38, just below the upper age limit to start a LISA. The idea was an additional retirement fund which she can access when she's 60 (provided the Government don't mess around with it in the interim).

As you probably know, the 25% bonus stops at the age of 50.

So she has 12 years of her cash growing at 25% plus the underlying interest rate on the account which at the time was around 2%. Then she'll have 10 years at whatever the underlying interest rate is at the time.

So in round terms she will have a consistent growth over 22 years of 13.6% pa + say 2% pa underlying interest.

I'd say that's not too shabby. Only hindsight will tell.

[nmdhqbc]

It's worthwhile but only if you can grow your investment well over that period.

Not relevant to the OP but I'm not sure what you would define as "grow your investment well".

My daughter took out at Cash LISA when she was 38, just below the upper age limit to start a LISA. The idea was an additional retirement fund which she can access when she's 60 (provided the Government don't mess around with it in the interim).

As you probably know, the 25% bonus stops at the age of 50.

So she has 12 years of her cash growing at 25% plus the underlying interest rate on the account which at the time was around 2%. Then she'll have 10 years at whatever the underlying interest rate is at the time.

So in round terms she will have a consistent growth over 22 years of 13.6% pa + say 2% pa underlying interest.

I'd say that's not too shabby. Only hindsight will tell.

not sure what calculation you've done to get to 13.6%pa before the interest. the 25% bonus only happens once for each £ put in so my gut is telling me that seems very high.

[Maroochydore]

not sure what calculation you've done to get to 13.6%pa before the interest. the 25% bonus only happens once for each £ put in so my gut is telling me that seems very high.

In round terms she has 12 years 'growth' of 25% (the bonus added with every deposit into the account - the supplier claims this for her and adds to her account about two weeks after she makes the deposit).

She then has a further 10 years without the bonus.

She saves the maximum £4,000 per annum.

So for the first 12 years she deposits £48,000 and gets £12,000 bonus = £60,000
Next 10 years is just her £4,000 per annum = £40,000
So she gets £12,000 bonus for her £88,000 = 13.6%

Plus the prevailing interest rate from the supplier of course.

[nmdhqbc]

So for the first 12 years she deposits £48,000 and gets £12,000 bonus = £60,000
Next 10 years is just her £4,000 per annum = £40,000
So she gets £12,000 bonus for her £88,000 = 13.6%

your original post said "13.6% pa" pa normally stands for per annum = per year. so you really meant 13.6% overall.

the way they've calculated it with the 10 years of non-bonus years is a bit weird since after age 50 there's not really any reason to put money into a LISA if there's no bonus. actually i wasn't aware you could just keep adding. better to find the best account available regardless of wrapper after tax has been taken into account. at that point overpaying into SIPP might be better to get the same 25% or more uplift or an ordinary ISA which can be accessed penalty free anytime.

[uspaul666]

My daughter bitterly regrets putting her cash into a LISA because she wants to live in London and there is a £450,000 limit on the total value of the property even if you are sharing with a friend or partner or only buying a part. This means she could not use her LISA money to help buy a 25% part ownership of a flat for £125,000. Something to watch out for maybe.

[DrFfybes]

My daughter bitterly regrets putting her cash into a LISA because she wants to live in London and there is a £450,000 limit on the total value of the property.

I suspect when they designed the scheme, a £450k limit for a first time buyer seemed 'adequate', rather like Bill Gates' alleged quote from the early 1980s, the 640kb would be as much as anyone could possible need in a computer

Paul