Lifetime ISAs - Explained
When unveiling the 2016 budget George Osborne announced the introduction of a Lifetime ISA which is due to launch in April 2017. There has been a lot of discussion about the effect that the Lifetime ISA will have on pensions and the recently launched Help to Buy ISA. In this article we will explain what we know so far about the Lifetime ISA.
Please be aware that the complete information regarding the Lifetime ISA has not been released yet and is a subject to consultation. Therefore we are only able to provide a general guide which we will be able to update once more details have been announced.
What is a Lifetime ISA?
The Lifetime ISA (LISA) was announced in the March budget with a planned launch date of 6th April 2017. It will aim to encourage young people to save for a home or retirement. Only people between the ages of 18 and 40 will be eligible for a LISA; however you will still be able to continue adding to the LISA once you pass the age of 40.
Allowing an individual to save up to £4,000 per annum, the LISA lets the saver build up to the maximum limit as and when they can afford it or in a single lump sum payment. The government will then add a 25% bonus to the total amount you have saved in the ISA at the end of the tax year.
So if you save the full amount of £4,000 you will receive a bonus of £1,000 from the government taking your savings to £5,000. That is before any interest or growth is applied.
What can you use the Lifetime ISA for?
The LISA has been created for two specific uses:
- First-time buyers purchasing a residential property - If a LISA has been held for 12 months or more, then a first time buyer will be able to withdraw the money to use for the purchase of their first residential property.
- Retirement Saving – if you have already purchased your first residential home and/ are planning to use the LISA to contribute towards your retirement planning then you are able to withdraw the money on your 60th birthday, either as one lump sum or as partial withdrawals.
The amount you withdraw is not subject to tax, when used to purchasing a first property or for retirement.
The government is hoping that once people have purchased their first home they will continue saving with the LISA for their retirement. If you wish to withdraw money held in a LISA not to purchase a home and before your 60th birthday you are able to do so, but it will cost you.
As it stands the following will apply if you chose to take out money from your LISA early:
- Bonuses that have accrued on cash held in a LISA will not be payable.
- Any interest that has built up on the bonuses will not be payable.
- Any withdrawals will be subject to a 5% penalty on the amount that you have decided to withdraw.
One of the areas that the government will be consulting on is if there should be penalty-free withdrawals if the fund removed are ‘borrowed’ and then fully repaid.
Using a Lifetime ISA to buy a first residential home?
If you are planning to use the LISA as a first-time buyer then you need to be aware of the following:
- You must not already own a property. Even if you have inherited a share of a property you will not count as first-time buyer for the purpose of a LISA.
- The funds may only be used on UK residential properties that cost £450,000 or less.
- If the property you’re planning to purchase is more than £450,000 then the bonus will be taken off the money that you have saved.
- When you are ready to purchase a home and release the money that is saved in the LISA it will be paid directly to your conveyancer or solicitor.
- You must have held the LISA for at least 12 months to be able to withdraw cash from it to purchase your first home.
- The LISA is intended to be used for residential properties only, therefore you are not supposed to rent out the property you have bought using a LISA. If you have bought the property with the intention of renting it out the government will seek to recoup the money paid out in bonuses. However if your personal or professional circumstances change after you have purchased the property then you will be able to rent the property out without the government seeking to recover the bonuses paid.
- As the LISA has been designed to encourage people to save for retirement, once you have purchased your first property, your LISA account will remain open.
- While the bonus to a LISA is traditionally paid at the end of a tax year if you are purchasing a property mid way through the tax year and withdrawing funds from your LISA then you will receive the bonus on any money that has been paid in. So for example if you open a LISA on 6th April 2017 and save £4,000 by the April 2018 you will receive a £1,000 bonus. If you then save an additional £4,000 by August 2018 and choose to buy your property then you will receive the full bonus of £1,000.
- If you are buying a property as part of a couple you are both able to use savings and bonuses from a LISA, as long as neither party is or has previously been a homeowner.
Are you a first-time buyer and not sure if you should use the Lifetime ISA or the Help to Buy ISA for your savings?
The introduction of the LISA came as a surprise to many as the Help to Buy ISA, also designed to help first time buyers, was only recently launched and some of the rules appear contradictory.
While you are able to hold both a Help to Buy ISA and a LISA, you are only able to use the bonus from one towards buying a house. Therefore depending on your circumstances you will need to decide which ISA is best for you.
The main benefit of the Help to Buy ISA is that you are able to withdraw money and receive a government bonus at any time, whereas with a LISA you must have had the account open for at least 12 months and have saved a minimum of £1,600.
If you are planning to purchase a property in London then you are able to use the bonuses from either the Help to Buy ISA and the LISA on a property up to the value of £450,000. Whilst this value remains the same for the LISA those who are using the savings and bonuses from a Help to Buy ISA are restricted to properties valued up to £250,000 outside of London.
The LISA benefits first time buyers that intend to save more than £2,400 per annum. The LISA allows you to save and receive as bonus which is greater than with a Help to Buy ISA. With a LISA you are able to save £4,000 a year, either in partial payments or as a lump sum, whilst a Help to Buy ISA restricts your savings to just £2,400 per annum in monthly instalments of £200.
Therefore if you save the maximum amount into both ISAs it would take you 3 years to receive a £3,000 bonus with the LISA however to receive the same bonus of £3,000 with a Help to Buy ISA you would need to save for 4 years and 8 months.
Please note that if you area first time buyer aged under 18 or over 40 then you will not be able to use a LISA and will need to save with a Help to Buy ISA.
As the LISA is not due to be launched until April 2017 you may decide to save in a Help to Buy ISA until that time and then transfer over to a LISA when they launch.
Using a Lifetime ISA to save for retirement?
Whether you have chosen to save for the purchase of your first home or retirement the way you save is exactly the same with a £4,000 maximum limit per year.
If you have chosen to use your LISA to save for retirement it is important to remember that if you withdraw any money before your 60th birthday you will face a penalty charge and lose the government bonus.
If you wait until your 60th birthday (or after) to take money out of a LISA then the money withdrawn is tax free, unlike any money that is taken out of a pension.
Concerns have been expressed that the LISA could stop people paying into pensions and ultimately leave their retirement funds short. However you do not need to one or the other instead you may wish to consider opening a LISA as a complimentary measure to your pension.
Benefits of using a pension over a Lifetime ISA:
- With a pension you are able to withdraw money from the age of 55 however with a LISA you will not be able to withdraw money (without a penalty) until you are 60.
- A basic rate tax payer will see little difference between the cost of saving money with a LISA and pension. To save £100 in a LISA and Pension will cost a basic rate tax payer £80 in their take home pay. The additional £20 coming from the government bonus and your gross tax income respectively. However if you are a higher rate tax payer you will receive 40% relief on pension contributions. So to save £100 into a pension will only cost a higher rate tax payer £60 whilst it would remain at £80 for a LISA.
- Anybody that is employed will receive pension contributions from their employer as a result of auto enrolment. However money paid into a LISA will not be subject to any top ups from your employer.
- Saving in a LISA may affect your benefit entitlements, whereas saving into a pension has no impact on benefit entitlements.
Benefits of using a Lifetime ISA over a pension:
- You are only able to withdraw 25% of your pension as a tax-free lump sum; the remaining 75% will be subject to income tax. Whereas with a LISA you are able to withdraw the full 100% completely tax free.
- You are unable to take cash out of a pension early (apart from in the instance of death or a critical illness) however you can do so with a LISA if you pay the 5% penalty.
- A LISA is more flexible in that you can use money saved in it for purchasing a home and also for retirement.
Interested in finding out more about the Lifetime ISA?
As we previously mentioned full details of the LISA are subject to consultation and probably changes. Full details will be revealed nearer to the launch date of 6th April 2017.
In the meantime if you would like to discuss the LISA, other forms of saving or your retirement planning then please do not hesitate to contact KDW.
Tel: 01727 85 22 99
Email: help@kdw.co.uk