A number of misconceptions about the Lifetime ISA (LISA) have sprung up over the year since the product was unveiled by then Chancellor George Osborne in the 2016 Budget. Danny Cox goes about debunking the myths...
From fears it may encourage savers to prioritise property over pension savings, to criticism over the age limit and exit charges involved, the LISA has attracted its fair share of scrutiny as providers, advisers and the regulator have all weighed in on its pros and cons.
Here Hargreaves Lansdown chartered financial planner Danny Cox (pictured) sets about debunking 12 myths about the LISA that have been aired to a greater or lesser degree over the last 12 months.
1. 'It is better to wait until the end of the tax year to open a LISA'
Investing at the start of the tax year means an investor's money will be working hard for the next 12 months, says Cox. "This should mean higher long-term returns. Furthermore, investors cannot use a LISA and the bonus to buy property in the first 12 months from when the account is opened, so the sooner they get that clock ticking the better."
2. 'The decision to invest in a Lifetime ISA is complicated'
"Our analysis shows most people investing in a LISA will do so to get help onto the property ladder," says Cox. "Therefore the decision is very straightforward - if you are aged 18 to 39, have not yet bought a property and want a government boost for your deposit, a LISA is for you."
3. 'People will choose a LISA over workplace pensions'
Research by Hargreaves Lansdown shows more than 80% of those who are considering a LISA for retirement savings see this as a complement to their other pension planning. "A workplace pension will always be the first consideration for retirement savings," adds Cox.
4. 'Few people will be interested in LISA'
Cox says government incentives to help people onto the property ladder are "extremely popular. The LISA is a much better and more flexible product [than Help to Buy], with greater choice of cash or investment, higher contribution limits and the bonus is added earlier," he argues.
5. 'Cash is the best solution for LISA'
For those who plan to buy in the next five years, cash will be the best option, Cox agrees. But he adds: "Many people underestimate how long it will take for them to save a typical £20,000 or so deposit. A stocks and shares LISA provides the potential for greater returns over five years and more."
6. 'A LISA is only for those interested in the stockmarket'
"Those who do not wish to invest in the stockmarket now should still make full use of their LISA allowance," says Cox."They could invest in a stockmarket LISA that has a 'cash park' option, so they can wait and make their investment decision later."
7. 'Those with a Help to Buy ISA should stick with them'
There are "many good reasons to transfer" savings from a Help to Buy ISA into a LISA, Cox says. However, he cautions: "As with any transfer, investors should check for costs before they do so. They should also stick with a Help to Buy ISA if they are planning to buy a property imminently."
8. 'It is difficult to open a LISA'
Cox says a LISA can be opened online or by phone "in as little as five minutes". "All you need is your national insurance number and a debit card with cleared funds in your account."
9. 'Savings in an ISA mean no need for a LISA'
ISAs should still prove popular for savers and investors but Cox notes: "For those planning to buy their first home, the LISA has up to a £1,000 a year government top-up advantage." And of course investors can choose to have both, subject to an overall contribution limit of £20,000.
10. 'Opening a LISA means needing to complete a tax return'
ISAs and LISAs do not have to be recorded on a tax return, Cox points out, so not only can they save people tax and potentially boost returns, they can also ease administration.
11. 'Parents and grandparents cannot gift money directly into a LISA'
That much is strictly true as, unlike Junior and Adult ISAs, only the LISA holder can add money to their account. But Cox adds: "Parents and grandparents can gift money to their children and grandchildren who in turn can invest in a LISA up to a maximum of £4,000 a year."
12. 'Too few LISA products will be available from the off'
Hargreaves Lansdown was among the first providers to express an interest in launching a LISA product and, along with Nutmeg and the Share Centre, comprised a limited degree of choice for those anxious to invest in a LISA immediately.
But Cox concludes: "As we have seen with the launch of other products such as the Junior ISA, while some providers will be ready from day one, the market will grow over the coming months."
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