Stephanie Charman takes a look at the latest developments on the government’s Lifetime ISA: A new savings account to help young people save for a house, or retirement.
As of April 2017, anyone between the ages of 18 and 40 will be able to open a Lifetime ISA, or “LISA”. Any savings put into the account before the account holder’s 50th birthday will also receive an added 25% bonus. There is no maximum monthly contribution, they can save as little or as much as they like, up to £4,000 per year. The total amount someone can save each year into all ISAs will also be increased to £20,000 as of April 2017.
The savings and the bonus can be used to either pay towards a deposit for a first home worth up to £450,000, or to help fund retirement. As with the Help to Buy ISA, the accounts are limited to one per person, as opposed to one per home, which means a couple can save twice as quickly if buying together. This has made it a popular move for young couples hoping to plan for not just their first home, but their future as well.
If they already have a Help to Buy ISA, the funds can be transferred over to the Lifetime ISA in 2017, or they can continue to save in both. But only one account will receive the bonus for a first home. So if they have both and intend to use the bonus on the Help to Buy ISA to go towards their deposit for a home, the Lifetime ISA must be used for retirement in order to receive the bonus on that account.
The treasury is keen to remind savers that the account is not a pension and therefore can exist and run alongside other long-term savings such as private pensions. Savers can still pay into a pension and get tax relief on their contributions.
The details surrounding who will offer the LISA is still being worked out. But as with the Help to Buy ISA, it will likely generally be offered by banks and building societies. The treasury says that the new LISA will be like other ISAs, in that the funds will contain a mixture of stocks, shares and cash. When the funds are eventually withdrawn, the returns will be free of tax.
If using the account for retirement, all the savings can be withdrawn tax free, including the 25% bonus, once they have reached their 60th birthday. It is possible to withdraw the funds before this time, but the governmental bonus will be lost, including any interest or growth gained. There will also be a 5% charge added if the funds are withdrawn before their 60th birthday.
If any or all of the savings are being used to go towards a residential property, the funds can be withdrawn at any time, as long as the account has been held for over 12 months, and will retain the full bonus. In this case, they will need to claim their bonus through their solicitor or conveyancer, which may be subject to additional fees.
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