Lifetime ISAs are only available to people between the ages of 18 and 40. Unlike standard ISAs, LISAs come with a HMRC top-up. If you invest £4,000, the tax man will add £1,000 to it. So, the limit is £5,000 and this uses up part of the annual ISA annual allowance of £20,000.
It is rare to get a HMRC top-up to anything and so there will always be a trade-off. In the case of the LISA, it is that the individual will need to use it towards the purchase of their first house. If they don’t manage that for whatever reason they can’t access the money, without losing the top-up, until they are 60.
There is a limit of £450,000 on the purchase price of the first home which should be enough for most people buying their first house but can be an issue for those buying in London.
The HMRC top-up is valuable to the LISA investor but if the person is unlikely to be able to use it to buy a first property, because you have bought them one that you will gift them for instance, then the age limit of 60 is a big issue.
If you can afford to give the next generation the full ISA allowance each year, then it might be better to do this and not tie them into the more restrictive terms of the LISA.
If you are happy to gift them money for their longer-term retirement a better option might be to gift money into a pension for them. They will get income tax relief at their highest rate of income tax paid (20% to 100%+ depending on salary) and they will be able to access the pension at 55 currently, rising to 57 shortly. You are also able to gift much more as the limit on a pension is 100% of their salary (with limits for very high earners).
Many clients worry about gifted money being spent unwisely but gifting up to these smaller annual amounts to fund LISA, ISA and pension has several benefits.
Firstly, if you can afford to gift these amounts out of your surplus income without impacting your own standard of living, then the gift is immediately exempt. The child gets the benefit of having money earlier in life and if handled right, this can help with their own financial education. In addition, early access to some money can be a good test of whether they are going to demonstrate good money behaviours when they have larger sums later in life.
