Introducing the Lifetime ISA
Since April 6th 2017 anyone between the ages of 18 and 40 has been able to save into a new, more flexible, ISA wrapper and use the proceeds to either get a foot on the housing ladder, or provide for their retirement.
The Lifetime ISA, announced in the 2016 budget, rewards savers by contributing £1 for every £4 they put away, and is seen by many as a step closer to a Pension ISA which would harmonise the tax treatment of personal pensions and ISA wrappers.
Those contributing to a Lifetime ISA (inevitably a ‘LISA’) can save up to £4,000 per year towards a first home or their retirement and receive a 25% bonus from the government.
When you reach age 50, you can make no further contributions to your LISA and neither will you receive additional bonus payments.
The LISA is seen as a further commitment to savings and investment by the Chancellor and provides another option for those considering their retirement planning.
‘rewards savers by contributing £1 for every £4 they put away’
Bonus payments are tax-free, and are paid each year into the account to allow for interest to be earned on it; savers also receive the rate of interest offered by the product provider.
However, there are restrictions on when you can access the money, with quite punitive terms for withdrawals before the age of 60 when not used to purchase a property; the LISA does not offer the flexibility of a conventional ISA as an alternative to a personal pension.
Those using the proceeds to purchase their first home can withdraw their money and the bonus after 12 months, and can use it towards a property up to the value of £450,000.
If you aren’t buying your first home you have to wait until you are 60 to receive the bonus, and withdrawals before the age of 60 not only result in the loss of the 25% bonus, but also incur a 5% fee.
Withdrawals, including the bonus, will be allowed before 60 if you are diagnosed with a terminal illness.
Savers and investors can open a new ISA each financial year, or keep paying into an existing one, and those opening a Lifetime ISA can do so alongside another ISA as long as the combined contributions do not exceed the annual subscription limit which was raised to £20,000 in the budget.
‘Bonus payments are tax-free, and are paid each year into the account to allow for interest to be earned on it’
The LISA comes hot on the heels of the Help to Buy ISA and with a very similar intent; those that have taken out a Help to Buy ISA will be able to transfer the funds into the new wrapper and still receive a 25% bonus on those savings when they buy their first home.
The main difference between the two products is that the Lifetime ISA lets you buy a house worth up to £450,000 anywhere in the UK whereas the Help to Buy ISA has a limit of £250,000 outside London.
There was no upper age limit with the Help to Buy ISA, as long as you are buying your first home, whereas the LISA is restricted to savers under 40.
Over time the government is expected to allow greater flexibility in accessing savings and investment, much more closely emulating the 401k accounts in the US which allow money to be borrowed from pension funds and be paid back.