Lifetime ISAs explained – the story so far
One of the most interesting developments to come out of this year’s Budget is the announcement of a new category of ISA, the Lifetime ISA. Although some of the detail is yet to be finalised, we should all take note of the potential for a bonus of up to £32,000 in cash from the government, and so here we take a quick tour of what we know so far…
Lifetime ISAs are due to launch in April 2017, which coincides with another significant increase in the ISA allowance, as it rises from its current level of £15,240 to £20,000 from the start of the next tax year. So whilst all contributions into a Lifetime ISA will count towards the total amount you can contribute into an ISA, savers will have another £4,760 of ISA allowance at their disposal.
The Lifetime ISA will provide a new way for those aged between 18 and 40 to save for both the purchase of their first property and their retirement simultaneously, with both cash and investment versions to be available. In addition to benefitting from the tax-advantages of an ISA, savers who use the account in certain ways could also retain a 25% bonus from the government on their contributions.
Who can use them?
To qualify you simply need to be aged 18 or over and under 40 on the date you open an account. They can be taken out in addition to a standard Cash or Investment ISA, as well as the current Help-to-Buy ISA. You can also open a Lifetime ISA even if you already own a property.
How will they work?
From its launch eligible savers will be able to contribute up to a maximum of £4,000 a year into a Lifetime ISA, however contributions made into the account before the holder’s 50th birthday will be eligible to receive the 25% government bonus – this essentially means they could gain an additional £1 for every £4 saved. This bonus element is not included as part of your annual ISA allowance.
The account will therefore have a maximum individual contribution limit of up to £128,000 (if you put in the maximum amount of £4,000 for every year between ages 18 and 50) which can be matched by the government bonus to a maximum of £32,000, giving a total of £160,000. The bonus will also be added each year, so you can earn interest or investment growth on it thereafter.
Getting the bonus payment
In order to retain the 25% bonus payments there are specific rules about how and when the savers need to use the capital within the account. Two scenarios are eligible, the first being anyone under the age of 60 using the proceeds towards purchasing their first property, and the second is anyone over the age of 60 using the funds to support their retirement.
Before the account holder is aged 60 years or over the only way to receive the bonus on their savings is to use the money within the account to purchase a property as a first-time buyer, either outright or using it for the deposit on a mortgage. In this instance the money will be paid directly to the person carrying out the conveyancing for the new home.
A first-time buyer is considered someone who has never owned property before whether in the UK or elsewhere, and in order to receive the bonus the property is also restricted to having a maximum value of £450,000 no matter where it is in the country. This is different to the current Help-to-Buy ISA which limits the property value to £250,000 if outside of London. The buyer must also be intending to live within the property so investment properties such as Buy to Lets would not be eligible for the bonus.
As the Lifetime ISA is an individual product couples are permitted to have one each, which means that a couple could generate up to £64,000 in a bonus payment towards the acquisition cost of their first home. In cases where one member of a couple has previously owned property but the other has not, they will still be able to benefit from one member using their Lifetime ISA to help fund the purchase.
Once the account holder reaches 60 years old they will be able to receive the bonus upon any full or partial withdrawal. The account proceeds can be used for any purpose and will be paid free of tax. Funds can also remain invested and any interest and investment growth will continue to be tax-free – this includes any capital left over in the account if the Lifetime ISA holder already used it to fund a ‘bonus-eligible’ first property purchase.
Savers looking to make a withdrawal before their 60th birthday for reasons other than their first property purchase will be permitted to do so, but they will have to repay all the money added to the account by the government. They will also incur a 5% charge upon the amount withdrawn – an early redemption penalty.
Lifetime ISAs and Help-to-Buy ISAs
You can have both a Help-to-Buy ISA and a Lifetime ISA, however you are only permitted to use the bonus of one of the accounts to purchase property. Before Lifetime ISA’s launch it is also possible to save with a Help-to-Buy ISA in the meantime and then transfer it into a Lifetime ISA when they launch.
Fair Investment view
Commenting on the Lifetime ISA, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited said: “The idea of a 25% uplift towards a deposit for buying your first home will be attractive to some, but it is those with half an eye on their retirement years that could really benefit. Building up a pot in a tax-efficient environment over which you have complete control as to how much you take out and when is an attractive proposition. Add in the 25% bonus and the fact that any interest or investment growth will be compounded over time, and you could potentially end up with a sizeable tax-free pot to complement any other retirement provision.”
He continued: “Assuming you started your Lifetime ISA at age 35 and paid in £4,000 each year for the next 15 years, which would have another £1,000 per year added to it by the government. Not only would you have received £15,000 in bonus payments, but if your fund had grown at 5% each year (net of charges), at age 60 your pot would be worth almost £200,000, all of which would be available to take completely tax free, as and when you wish.”
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular plan. The example used in this newsletter is for indicative purposes only and all funds will contain their own risk element in relation to growth and performance. If you are at all unsure of the suitability of a particular product, both in respect of its objectives and its risk profile, you should seek independent financial advice. Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.