The new Lifetime ISA - what is it and how could it help my long-term savings?
Tuesday, January 3, 2017
Finding the thought of house deposits or future pension prospects daunting? Looking for ways to save for your future or that of your kids?
The new Lifetime ISA or LISA, announced by the government in the 2016 Budget, could be the answer you are looking for. This new savings account, a form of the better known ISA or NISA, has been designed to help people aged 18 - 39 save for both of these eventualities. All with the benefit of the government adding a bonus of up to £1,000 every year until the account holder reaches the age of 50.
What is the Lifetime ISA (LISA)?
In a nutshell, the Lifetime ISA has been designed to encourage tax-free long-term saving with two purposes in mind:
- To help buy a first home
- To help save for retirement.
How does the LISA work?
From April 2017, those aged 18 to 39 years old can open a Lifetime ISA and pay in up to £4,000 each tax year (a tax year runs from 6th April one year to 5th April the next).
Account holders will be able to make payments into the LISA up to the age of 50.
How does the government bonus work?
The government will add a 25% bonus to help boost your savings – meaning that individuals who save the maximum will receive a guaranteed £1,000 bonus each year from the government, in addition to any investment growth their LISA may achieve.
For example, if you open a LISA at age 18 and pay in the maximum £4,000 per year until age 50, you could earn a government bonus of £32,000 and end up with £160,000 in savings.
Another example could involve opening a LISA at age 20 and using it to save for a deposit on a new home for a period of 10 years. In this instance, paying in the maximum each year, you could earn a government bonus of £10,000 and end up with a house deposit totalling £50,000.
How can the LISA be used?
Funds saved in a LISA can be used in the following ways:
- To help buy a first home worth up to £450,000 at any time from 12 months after you first pay into the LISA.
- Funds can be withdrawn from the Lifetime ISA from age 60, tax-free, for any purpose.
- Savers will also be able to access their funds if they become terminally ill with less than 12 months to live.
It’s worth noting that if you are using a Lifetime ISA to buy a first home, your partner can also use a LISA to save for the deposit meaning that you can benefit from two lots of government bonuses doubling your savings effort. Once you have used your savings to buy your first property, you can continue saving into the Lifetime ISA and you will still receive the government bonuses.
Are there any restrictions to the Lifetime ISA?
For 2017/18 only, there will be no Government charge on withdrawals from Lifetime ISAs. However, if you want to withdraw from the Lifetime ISA in 2017/18, for any reason other than terminal illness, you must fully close the account. Doing so will essentially cancel your LISA account. There will be no Government charge due on the closed account, but there will also be no bonus paid on it at the end of the tax year. You will be able to open a separate, new LISA later on in that tax year if you wish to.
From April 2018 onwards, all withdrawals from a LISA (other than the statutory exceptions and accounts closed within the 30 day cancellation period for newly opened LISAs) will attract a 25% Government charge applied to the amount being withdrawn. This returns the government bonus element of the fund (including any interest or growth on that bonus) to the government with an additional 5% charge applied.
As with NISAs, will transfers be allowed?
LISA savers will be able to transfer their Lifetime ISA between ISA managers. There will be no limit on the amount that can be transferred.
During the 2017/18 tax year only, those already saving into a Help to Buy: ISA will be able to transfer any funds (including interest) built up before 6th April 2017 into a Lifetime ISA without the transfer counting towards the LISA contribution limit. They will also receive a 25% government bonus on the full value of the transferred funds.
Contributions to a Help to Buy: ISA made on or after 6th April 2017 can still be transferred but will count against the LISA contribution limit for the year in which they are transferred.
The Help to Buy: ISA will be open to new savers until 30th November 2019, and savers will be able to claim a bonus until 1st December 2030. Savers will be able to save into both a Help to Buy: ISA and a Lifetime ISA, but will only be able to use the government bonus from one of those accounts to buy their first home.
Will the Lifetime ISA provide more flexibility in the future?
Potentially. The government has already listened to industry feedback and simplified the product for the 2017/2018 tax year and is continuing to consider whether there should be the flexibility to borrow funds from the LISA without incurring a charge if the borrowed funds are fully repaid and whether there should be specific life events where individuals can have access to their Lifetime ISA without a charge.
However, these possible features will not be available at the time the product launches in April 2017. Watch this space…
What if I am not eligible for a Lifetime ISA?
If you fall outside of the 18-39 age bracket, unfortunately you will be unable to use the Lifetime ISA to save for either a first property or your pension. However, you can still make use of an ISA and use your tax-free savings allowance, currently £20,000 in the 2017/2018 tax year, to save for your future.
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