Lifetime ISAs unpacked

The new Lifetime ISA (LISA), available since 6 April 2017, is a useful addition to the range of government-assisted savings products.

The opening of a LISA is restricted to individuals aged 18 to 39, but once you have one, you can save up to £4,000 each year up to the age of 50 — and receive a 25% government bonus on your contributions. On this basis, an 18 year-old who contributes £4,000 each year can therefore receive a total of £32,000 in bonuses (£1,000 a year for 32 years).

What’s the purpose?

This is intended to be a medium to long-term vehicle for saving towards retirement or the purchase of a first home. If you are saving for retirement you can only withdraw funds free of penalty from the age of 60, or if you are terminally ill. When it comes to buying a first home, you can withdraw the money for a property worth up to £450,000 (£250,000 outside London) any time from 12 months after you first save into the account.

Any other withdrawals will incur a 25% charge, unless it is the closure of the account during a 30-day cooling off period. The first bonus will be paid in April 2018 but thereafter bonuses will be added to the account monthly. Savings in a LISA (though not the bonus) count towards the overall £20,000 annual limit on ISA investments.

Saving for retirement

As a means of saving for retirement, a LISA is very different from buying a pension. There is no tax relief on savings (although the bonus is equivalent to 20% basic rate tax relief) and employers cannot contribute. The maximum investment in a LISA is much lower, but there is no tax to pay on withdrawals from it. On death, a LISA forms part of the estate, unlike pension savings. For many people it’s probably best seen as a supplement to a pension plan, not a replacement.

If you already have a Help to Buy ISA, during 2017/18 only, you can transfer savings built up before 6 April 2017 into a LISA and still save an additional £4,000 in the year.

Only three providers were ready to offer the new LISAs at their launch date. However, for most savers — apart from those approaching their 40th birthdays there is no rush to open one early in the tax year because the 2017/18 bonus will be the same regardless of when funds are deposited.

This newsletter is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The newsletter represents our understanding of law and HM Revenue & Customs practice as at 2 May 2017.

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