Lifetime ISAs

The Budget held in March 2016 introduced another different type of ISA, known as the Lifetime ISA, or LISA.

Although some of the details are yet to be finalised, it seems very likely that the Lifetime ISA will be an extremely popular product.

Here’s how it will work: from April 2017, anyone between 18 and 40 years of age will be able to open a Lifetime ISA. They will be able to save up to £4,000 each year until their 50th birthday and receive a 25% bonus on these contributions from the government. Money in a Lifetime ISA account can be saved until you are 60, or it can be used to buy a first home.

So if you saved the full amount from aged 18 until you are 50, you would have made total contributions of £128,000, which would entitle you to a bonus of £32,000. Of course, your contributions, which can be put in either a savings account or investment products, will hopefully have grown substantially over this time.

Chart showing how you can use your Lifetime ISA bonus

 Opening a Lifetime ISA

It anticipated that opening a Lifetime ISA will be similar to opening any other ISA, so you will have to provide details such as your National Insurance number, date of birth, and so on.

You can open more than one Lifetime ISA if you want, but you will only be able to pay into one Lifetime ISA each tax year.

Saving into a Lifetime ISA

You put cash into your Lifetime ISA, which can then be put into either a savings or investment vehicle. It’s anticipated that you will be able to put more than £4,000 a year into your Lifetime ISA each year if you want (up to the £20,000 overall limit for ISAs that comes into effect in April 2017), but you will only receive the government bonus on the first £4,000.

The government bonus will be paid into the account at the end of each tax year, so this additional money can also be used for either saving or investing, and continue to grow in value as well.

Using the funds

You can use the funds in your Lifetime ISA, including the government bonus, to buy a first home in the UK worth up to £450,000 at any time from 12 months after opening the account. Couples buying a home together can each have a Lifetime ISA and each get the government bonus. The money will be paid direct from your ISA manager to your conveyancer, and can be returned to your ISA manager should the purchase not proceed.

You can also use the funds in your Lifetime ISA from age 60 for any purpose – which for most people will mean to fund their retirement, either instead of or alongside a pension.

Should you be diagnosed with a terminal illness, then you will be able to get access to the funds before you are 60 and suffer no penalty. And should you die, the ISA can be transferred over to your spouse or civil partner.

The government is also going to consider whether the funds can be used for other life events.

If you want, you will also be able to access the funds before age 60 and without using it for a house purchase. However, in these circumstances you would lose any bonus received (including any interest or capital growth on that money), plus incur a charge of 5%.

Interaction with Help to Buy ISAs

A lot of the features of the Lifetime ISA are similar to the Help to Buy ISA (which was only introduced in late 2015), although you can save more into the former. You will be able to save into both a Help to Buy ISA and a Lifetime ISA at the same time, but you will only get the government bonus on one of these accounts when you use the funds to buy a home. So you could open a Help to Buy ISA and use the bonus for that to buy a home, and also open a Lifetime ISA and use that bonus for retirement.

Exactly how these two accounts will interact is a little complicated. For example, for the 2017/18 tax year only, those who already have a Help to Buy ISA will be able to transfer these funds into a Lifetime ISA and receive the government bonus on those savings. This chart shows how that will work:

Chart showing how you can transfer money from Help to Buy ISA to a Lifetime ISA

What next?

The government is consulting with financial services companies on exactly how Lifetime ISAs will work in practice. It’s expected to publish more details this Autumn, so watch this space. It would be good to see that 5% early withdrawal charge get canned as part of this process.

As you could own this product for decades (well, it’s called a Lifetime ISA for a reason), we’d definitely advocate using the money for investing rather than saving, as shares tend to produce much better returns than savings accounts over longer time periods. But if you’re planning to use it to buy a first home, and possibly just saving for five years or less, then sticking with cash may be more appropriate.

One point to consider is that if you have a Workplace Pension or a company pension where your employer effectively matches your contributions, then the extra cash you receive from this may well exceed the government bonus aspect of the Lifetime ISA. And if you had the misfortune to be declared bankrupt, it’s worth bearing in mind that your pension would normally be protected from this process, whereas a Lifetime ISA presumably would not. On the flip side, a Lifetime ISA should be more flexible than a pension, in that it’s much easier to get access to your money.

All in all, though, the Lifetime ISA looks like a welcome addition to the range of tax-efficient products we have at our disposal.

 


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