If you want your children or grandchildren to have the greatest opportunity to achieve their financial goals, you may want to consider encouraging them to save or invest through a Lifetime ISA (LISA).

A LISA is a type of saving or investment account specifically designed to help young people purchase a first home or save towards retirement.

LISAs have some interesting rules compared to other accounts, most notably that you are paid a 25% government bonus on your contributions.

However, to balance this benefit, unauthorised withdrawals are penalised, also at a rate of 25%.

Even though the government reduced this penalty amid the Covid-19 pandemic to allow younger individuals to access their funds, it has since returned to its original level, and FTAdviser reports that there have been calls to reduce it permanently.

Regardless of whether this does happen, these tax-efficient accounts could still remain a valuable way for your loved ones to save towards their first home or retirement.

So, read on to determine whether your children and grandchildren may want to consider saving and investing through a LISA.

Saving for a deposit for their first home, or making an early start on retirement saving

A LISA is an individual savings account available to anyone between the ages of 18 and 39, making it ideal for an adult child or grandchild. They can continue making contributions to the LISA up to age 50, so long as they opened the account before their 40th birthday.

The money in them can exclusively be used for purchasing a first home up to the value of £450,000, or for saving towards retirement. Your child or grandchild will typically face a 25% withdrawal penalty if they access the money before then.

Your child or grandchild can save up to £4,000 each tax year in a LISA, which counts towards their overall ISA allowance (£20,000 in 2023/24). So, for example, if they contributed the full £4,000 to their LISA in the 2023/24 tax year, they could only save a further £16,000 into their other Cash or Stocks and Shares ISAs.

Your younger family members aren’t limited to a typical savings account, either. While there are Cash LISAs that work much like savings accounts, they could also invest in a range of securities through a Stocks and Shares LISA.

Just as with other types of ISAs, LISAs are highly tax-efficient. Your child or grandchild will face no Income Tax on interest on their savings, or Capital Gains Tax (CGT) on investment returns generated.

Up to £1,000 in government bonus each tax year

Arguably the most significant benefit of a LISA is the government bonus your child or grandchild can receive on their contributions.

They will receive a 25% bonus from the government on contributions up to the £4,000 allowance. For example, if your child or grandchild contributed £1,000 to their LISA, they would receive an extra £250 from the government.

With the £4,000 limit, that means they could receive a government bonus of up to £1,000 each tax year. This is a considerable sum of money and could make all the difference towards their saving targets.

Better yet, government bonuses are saved back into the LISA, meaning they can be directly reinvested. This can allow your child or grandchild to benefit from compound interest or returns – that is, the more you have saved or invested, the more your potential returns are magnified.

There are penalties for unauthorised withdrawals

One of the most important caveats of LISAs to remember is the penalty for unauthorised withdrawals.

Your child or grandchild will typically face a 25% withdrawal penalty if they attempt to take money out of their LISA for anything other than:

-Buying a first home

-Reaching the age of 60

-Being diagnosed with a terminal illness.

The penalty removes any government bonus, plus a bit more to act as a deterrent from making withdrawals for reasons other than the intended purposes of the account.

For instance, image your child or grandchild has saved £4,000, giving them a total of £5,000 after the bonus.

If they then needed to access their money, the 25% penalty would apply to the total £5,000, meaning they’d lose £1,250. In this case, they’d have lost their £1,000 government bonus and £250 of their own savings.

Amid the height of the Covid-19 pandemic, the government did relax these rules, reducing the withdrawal charge from 25% to 20%. This allowed younger people to access money they might have needed during this period without being penalised.

So, using the figures from the example above, a 20% charge on £5,000 would mean your child or grandchild would only lose £1,000 – essentially removing the government bonus, while leaving the rest of their savings untouched.

Recently, there have been calls to drop the withdrawal penalty to 20% permanently.

This is because many people have been attempting to access money locked away in their LISAs in an attempt to build up their financial resilience during harsh economic conditions, such as the current cost of living crisis.

According to FTAdviser, the number of LISA penalties rose by 17% in 2022, showing how this has been an issue throughout the last 12 months.

Meanwhile, if this penalty permanently dropped to 20%, your child or grandchild would only lose £1,000 in the above example – their own personal savings would be unaffected.

If the government does decide to remove the LISA penalty for unauthorised withdrawals, this could make these accounts even more valuable to your children or grandchildren.

Get in touch

Want to find out how you can support your children and grandchildren’s financial future? We can help at Cordiner Wealth.

Email hello@cordinerwealth.co.uk or call 0113 262 1242 to speak to us today.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

All contents are based on our understanding of HMRC legislation, which is subject to change.