Personal Finance

Is a LISA halal or haram?

A Lifetime ISA is an account which lets you save up to £4,000 a year with the government adding a 25% bonus. So if you save the maximum, that’s a tidy £1,000 in your pocket. In the investment world, a 25% return is pretty astounding.

I’m not going to go in-depth on the actual product here. There are lots of good mainstream places that you can search for and look at.

The focus in this article is for Muslims who are hesitating on whether a LISA is halal. We’re going to reveal when the LISA is halal and when it isn’t. We’re also going to reveal a hack that you’ll find very helpful.

That’s right – the LISA itself can be both haram or halal, depending on where you open one and what you put in it.

Don’t let that put you off though: it’s easy once you know what to look out for. Just follow our guide and you’ll be saving in your LISA in no time.

Let’s kick off with a key question.

Is the 25% Government bonus halal?

The key benefit of a LISA is the 25% government bonus. You must be wondering whether this is riba or haram for some other reason.

The good news is that a government bonus is perfectly permissible. We’ve explained the logic on this before when we discussed Help To Buy ISAs and the Help To Save scheme.

Basically, this isn’t like a standard commercial transaction where you get a return for your money. It’s a governmental scheme for very specific purposes (you can only withdraw the money penalty-free if you’re buying a home or retiring).

From a fiqhi perspective, it is seen as a gift.

In short, we’re fine on this front.

What else is problematic then?

The government bonus isn’t the tricky part. The tricky part is then understanding where to open a LISA.

The reason for that is because like a normal ISA, there are basically two types:

  1. Cash LISAs; and
  2. Stocks & shares LISAs.

Cash LISAs

These are unequivocally haram because they invariably pay interest on your cash. To be clear, we’re not talking about the 25% government bonus here. We’ve already said that’s fine.

What we’re talking about here is the bog standard cash LISA offered by the main banks and building societies. For example this one by Skipton Building Society.

If there happened to be a cash LISA that paid no interest, that would be fine.

I doubt you’ll find one though as the mainstream market will always want an interest return for depositing cash.

Check out my hack below though for how to find a no-interest LISA account.

Stocks & Shares LISAs

We’ve ruled out cash LISAs and we’re left with stocks & shares LISAs. These must be halal right? Well, it depends.

You see a stocks and shares LISA is a bit like opening a Just Eat account. But swap eating for investing.

In your Just Eat account, you can choose from lots of halal places, but there are also a lot of haram takeaways too. It’s the same with a stocks and shares LISA: you can choose from lots of halal companies to invest in, but there are loads of haram ones too.

The key point is this: so long as your stocks and shares LISA has halal investments within it, it’s halal for you. Same ruling for Just Eat by the way.

Here’s a (very) fancy graphic I drew to summarise.

Investing is scary though, I just wanted the 25%

I hear you. I’m going to give you a bit of a hack if you really don’t want to invest. It only works for £10,000 and under though and only with one provider.

But I’m also going to try and convince you that investing isn’t scary and you don’t need to be Warren Buffett.

The Hack

The hack if you’re dead against investing is to open a LISA with AJ Bell, deposit cash, and don’t invest it.

Just leave it as a cash balance in the account. You’ll still get the government bonus but you won’t have had to invest.

The reason is that AJ Bell don’t pay interest on accounts with cash of £10,000 and below. See here.

Like I say, it’ll only work until your balance hits £10,000 but you can only do a maximum of £4,000 per year anyway so you should be good for at least 2.5 years.

Investing

If you do the above, you’ll get your 25% bonus which is a great return. But if you invest, you could be growing the total amount of cash via an investment.

Here’s why you shouldn’t be scared: if you go for an AJ Bell LISA or a Hargreaves Lansdown LISA, you’ll be able to select from a bunch of sharia-compliant funds.

If you don’t know what a fund is, it’s basically a basket of companies that have been pre-chosen by a specialist fund manager.

You’ll have to pay a small management fee to buy into the fund, but in return you’re getting the opportunity to benefit from the value of the fund increasing because the shares have hopefully done well.

By buying a fund, you’re also not having to worry about choosing which shares to buy yourself.

So you could deposit your £4,000, get your £1,000 bonus for year 1, and invest the lot in a sharia-compliant fund. If that fund price increases by say 8%, you’ll be up a further £400.

Obviously fund prices can go up and down so you are exposing yourself to loss too, but over time, the stock market tends to smooth out.

I’ve mentioned AJ Bell and Hargreaves Lansdown as I know they have decent Islamic options in their fund offerings. You can take a look at them in our halal investing comparison page.

Conclusion

LISAs are perfectly halal as long as you go for a stocks and shares LISA and you’re investing in halal stuff (or keeping it as cash only and attracting zero interest, e.g. with an AJ Bell stocks and shares LISA). Head over to our halal investment comparison page to see which sharia-compliant funds you can invest in and on what platform.

11 Comments

Keep Reading

11 Comments. Leave new

  • Wajahat Hussain
    April 3, 2020 9:58 pm

    If I’ve already opened an ISA with AJ Bell and invested into the “iShares MSCI USA Islamic UCITS ETF USD”, does that mean I can’t open a LISA, drop £4000 & get my free £1000 😬? Trying to take advantage before tax year is up! ⏰

    Reply
  • In regards to the hack
    Would you advise doing this with HL? it seems that they won’t add any interest to a cash LISA so you could effectively deposit cash, get the 25% without any interest. (Do correct me if I’m missed something here)
    https://www.hl.co.uk/charges-and-interest-rates

    Reply
  • So one of the requirements to withdraw money from a LISA to buy a house is the fact that you must buy the house with a mortgage?

    Now my question is that would you be able to buy the LISA with an ISLAMIC mortgage as they operate a little differently from the traditional mortgages ? Or does this invalidate this option leaving LISA for use only as a pension fund?

    Reply
    • Ibrahim Khan
      May 10, 2020 10:53 pm

      You can withdraw and use it for a LISA.

      Reply
      • Sorry, what do you mean by this? I thought withdrawing from the LISA came with a penalty charge which negated its benefits? Could you elaborate please? Thanks

        Reply
  • Abdul Hussein
    May 11, 2020 3:43 pm

    Salaams

    I spoke to HL today. They only have one Lisa and one s&s isa which both are interest paying but currently do not pay interest due to the current situation. They advised that you can put a marker on the Lisa account advising them not to pay out interest on the account and therefore that is one way of circumnavigating that issue. In that respect the Lisa should still be around if that correct? Only thing is you’ll have to wait till 60 to get the amount and you cannot reinvest that money unless you take the money out and pay the 25% fee which cancels or the top up the government gives.

    My question is what do you mean by reinvesting the Lisa money or have I read that wrong? Secondly, forgive me if I have missed it but what sharia compliant s&s isa are there as the HL one isn’t according to them. Or is it that I open the account and tell them exactly what funds to invest my s&s isa account money with? In which case any advice on what those funds would be?

    Jzk

    Reply
    • Mohsin Patel
      May 11, 2020 6:25 pm

      1. I’m not sure what you mean by the reinvesting point – where did you hear that? Basically, once your money is in the LISA you can’t take it out.
      2. Yes that’s right – a S&S ISA in itself is just a wrapper. Your choice of what to invest in is what makes it halal or not.

      Reply
  • Abdul Hussein
    May 11, 2020 6:59 pm

    1. “The Lifetime ISA bonus is paid as cash directly into your Lifetime ISA, so you’re able to invest it straight away. If you’re not sure where to invest, our investment ideas can help.”

    This is off the AJ Bell website which confused me.

    “So you could deposit your £4,000, get your £1,000 bonus for year 1, and invest the lot in a sharia-compliant fund. If that fund price increases by say 8%, you’ll be up a further £400.”

    This is off this page. I’m getting confused how you can invest the money if you cannot touch it.

    2. Your halal investment comparison page gives loads of different options with stocks and shares being one but it wasn’t clear which ones were s&s isa’s as some were just funds. I thought you have to apply for an s&s isa account to get the tax break therefore just investing in a fund will not give you the same protection as an s&s isa. For example, I am aware of wahed invest and invest with that but that is not an isa is it? It is just a fund management scheme (apologies the correct term escapes me currently).

    Also if you have an Lisa how many deposits a tax year are you allowed to make into the account? Are you able to make multiple deposits I.e. Set up a standing order and the government will make a 25% contribution for each payment or is it a one off payment you are allowed to make (up to the 4k limit of course)?

    Would be great to get clarity on the above for a simpleton like myself 😊

    Reply
    • Mohsin Patel
      May 13, 2020 2:38 am

      I see your confusion now! I think you are overcomplicating it a bit.

      The way to understand a S&S LISA is that it’s just a vehicle or a wrapper. Think of it like going to a supermarket. When you enter the supermarket (i.e. when you open an S&S LISA), you get your govt bonus in cash. But then within your LISA you can invest that money – you don’t have to keep it as cash (i.e. you can go shopping in the supermarket). What you then invest in (i.e. what you buy) should be halal.

      Also, on the Wahed point, you can open an ISA with them. An ISA, LISA, etc is just a wrapper as I explained above. The things you can buy within them should largely be similar. Once you have the account, you just buy it. But it’s buying it WITHIN your ISA/LISA etc that gives you the tax benefits.

      Re the LISA deposits, I understand that the max is £4k per year. I imagine you get the govt top up each time, but probably best to ask your LISA provider.

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

Fill out this field
Fill out this field
Please enter a valid email address.
You need to agree with the terms to proceed

 

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Muslim Startups are not getting Venture Capital funding – This is Bad For Our Economy
Help to buy ISA – is it halal?
Every British Muslim needs a will. IFG Wills is an affordable quality option entirely online.

Follow IFG

YouTube
Get exclusive tips, resources and courses delivered straight to your inbox from IFG.
  • This field is for validation purposes and should be left unchanged.
Menu