How to maximise your savings: 5 benefits of a sustainable LISA
What is a Sustainable LISA and how does it work?
A LISA, or Lifetime Individual Savings Account, is a tax-efficient savings account designed to help individuals save for their first home/and or later on in life, with access to the money at age 60. Lifetime ISAs are available in both cash and stocks and shares, however you can only have one type of Lifetime ISA each tax year. If you choose to invest in a Lifetime ISA in stocks and shares you could have the option of investing in a sustainable fund that will allow your Lifetime ISA to have a positive impact on the environment.
To open a LISA, you must be between the age of 18 and 39. You can contribute up to £4,000 each tax year until the age of 50 and your contributions will be topped up by a government bonus of 25%, up to a maximum of £1,000 per year.
The money you save in a LISA can be used to buy your first home (up to the value of £450,000), and/or can be saved for retirement. Money not used for the purchase of a first home can be withdrawn penalty-free after the age of 60.
Sustainable funds invest in companies that meet specific environmental, social, and governance (ESG) criteria, considering financial return at the same time.
Benefit 1: Tax-free savings for life
One of the key benefits of a LISA is that it provides tax-efficient savings for important moments in life. This means that any contributions you make to your LISA, and any returns you earn on your investments are entirely free from UK income tax and capital gains tax.
You also won’t have to pay any tax when you withdraw your savings after 60, which can help you further stretch your retirement income.
Benefit 2: Government bonus on your contributions
Another significant benefit of a LISA is that the UK government provides a bonus on your contributions, making it easier to reach your savings goals. The government will add a 25% bonus of the amount contributed to your Lifetime ISA.
For example, if you contribute the full £4,000 to your LISA in one year, the government will add a bonus of £1,000, bringing your total savings to £5,000. This bonus is paid annually, so you can receive the government bonus each year if you continue contributing to your LISA.
The bonus is paid directly into your LISA account, so you don’t need to claim it separately or pay additional taxes. It’s a great way to boost your savings and help you to get on that property ladder or save for later on in life faster.
It’s important to note that if you withdraw funds from your LISA before age 60 for any reason other than buying your first home, will be subject to a penalty fee of 25%. This penalty fee is there to discourage early withdrawals and encourage savings for the long term. If you withdraw your savings after 60, the government bonus is yours to keep or if you use this to purchase your first home this money can be used for your deposit, in addition any money you have saved.
Benefit 3: Sustainable investing for a better future
A Sustainable LISA or a Lifetime ISA that invests in a sustainable fund, offers a unique opportunity to invest in a way that considers environmental, social and governance factors at the same time as financial return.
This might include considering an organisation’s carbon footprint, how they treat their workers, or their governance practices. This can help drive positive change now and for the future.
Benefit 4: Government bonus and withdrawals
One of the key benefits of a Sustainable Lifetime ISA, or any Lifetime ISA in fact, is the government bonus that is added to your contributions. The 25% bonus on contributions upto £4,000 each tax year means that you can build a savings pot to get onto the property ladder and/or for savings for later on in life.
The money in the Lifetime ISA can be used towards purchasing a first home in the UK up to the value of £450,000. You must hold the Lifetime ISA for at least 12 months before using it towards purchasing a first home. The money must also be used in conjunction with a mortgage.
Or the money can be used to contribute up to age 50, and accessed from age 60, if not the money towards a first home.
If the money is withdrawn and not used for a first home or accessed after age 60, then the government penalty of 25% of the withdrawn amount will apply. This means that the government will claim back any bonus contributions and more.
How to open and manage a sustainable LISA
If you are looking for a Sustainable Lifetime ISA, Foresters Financial have introduced a new fund for their Lifetime ISA that has a focus on sustainability, which aims to have a positive effect on people and the planet. Here are the basic steps to get started:
- Find a Sustainable LISA provider: Research your options and compare the fees, investment options, and customer service offered by different providers to find the one that best suits your needs.
- Check your eligibility: To open a Sustainable LISA, you must be a UK resident aged 18-39. You must be either saving for a first home, in the UK under £450,000 or saving for retirement (accessing the money from age 60 onwards).
- Make your first contribution: You can make an initial deposit when opening your Lifetime ISA. After that, you can contribute up to £4,000 each tax year and choose to make regular contributions or one-off contributions as and when you have the funds available.
- Manage your Sustainable LISA: Once you have opened a Sustainable LISA, keeping track of your contributions and investments is essential. Many providers offer online account management tools that allow you to view the value, track your contributions, and change your investment options.
Final thoughts: Why sustainable LISA is a smart investment for your future
A Sustainable LISA, or a Lifetime ISA that invests in a sustainable fund provides tax-efficient savings and a government bonus on your contributions, but it also allows you to invest in a way that can align with your values and contribute to a more sustainable future.
With all tax-efficient savings, tax treatment depends on individual circumstances and may be subject to change.
