Earlier this year, the government announced a new Lifetime ISA will be launched in April 2017 to help young people buy their first home and save for retirement.
What is a Lifetime ISA?
The Lifetime ISA is to be a new option for those aged between 18 and 40 saving for retirement or a house deposit. Those eligible will be able to pay in up to £4,000 each tax year and continue making contributions up to the age of 50. The government will add a 25% bonus to each of these contributions, which means individuals who save the maximum will receive a £1,000 bonus each year from the government. As with a regular ISA, the money grows tax-free.
The accumulated pot can be used to buy a first home of up to £450,000 at any time from 12 months after opening the account. If two first-time buyers are purchasing together then both their pots can be used. Alternatively, money can be withdrawn tax and charge free from age 60 for any purpose. Access is also possible in the event of terminal illness.
Savers will be able to make withdrawals at any time for other purposes, but with a 25% government charge applied to the amount of withdrawal. This returns the government bonus element of the fund (including any interest or growth on that bonus) with an additional charge applied.
The overall amount you can save each year into all ISAs will be £20,000 from April 2017, £4,000 of which can be into a Lifetime ISA if you are eligible.
Further clarification confirmed
In an updated technical note on the design of the Lifetime ISA the following has been confirmed:
• In the 2017/18 tax year, the 25% bonus will be added at the end of that tax year, but from 2018/19 it will be paid on a monthly basis.
• The bonus will be paid on contributions rather than the size of the investment. This means if you contribute £4,000 you would receive a £1,000 bonus, no matter if the value of the investment rises or falls.
• Only cash or shares from maturing SAYE schemes will be permitted contributions.
• It will be possible to transfer existing ISAs of any other type into a Lifetime ISA. Any such transfer counts against the £4,000 annual Lifetime ISA limit, though not the overall ISA limit for the year.
• Savers in a Lifetime ISA can use the full pot for a house deposit, including the 25% government bonus, at exchange of contracts. This is in contrast to Help to Buy: ISAs where the bonus only adds to the equity in the house purchase rather than the deposit amount because the conveyancer has to apply for it during the house buying process.
• Any transfers in the 2017/18 tax year of Help to Buy: ISA funds built up before 6 April 2017 will not count against that year’s £4,000 Lifetime ISA contribution, and will receive the 25% government bonus. Help to Buy: ISAs will still be available until November 2019 and savers will be able to claim a bonus on a house purchase until 1 December 2030. It will be possible to save into a Help to Buy: ISA and a Lifetime ISA simultaneously, but you can only use the government bonus from one of these accounts to buy a first home.
• The government is considering the flexibility for people to borrow funds from their Lifetime ISA without incurring a charge if the borrowed funds are fully repaid, but this will not be available when the Lifetime ISA is launched next April.
The above article by Rob Morgan, Pensions & investments Analyst at Charles Stanley, was first published by Charles Stanley on 21st September 2016.