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Kirk Rice Blog

Lifetime ISA – Everything You Need To KnowWritten on February 28, 2017 by Kirk Rice LLP

A handout of up to £32,000 in cash from the government is the sort of offer that should grab your attention. Many younger people are unable to afford to buy a house and believe that they will have to work until they drop because they won’t have a pension. Could the new Lifetime ISA (LISA) help them? In this article, we answer a few questions about the new scheme. For information on ISAs and investments in general, please see our website.

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Is it free money?

The Lifetime ISA (LISA), available from April 2017, is a savings account that will encourage people to save towards their first home and retirement. It’s a targeted offer for those people under the age of 40 at April 2017. Individuals will be able to open a Lifetime ISA from the age of 18 to the day before their 40th birthday.

Individuals can invest up to £4,000 a year. The government will then provide a 25% bonus on the contributions at the end of each tax year. This means those who put in the maximum each year will receive a £1,000 bonus every 12 months from the government.

Savers, able to make contributions from the age of 18 until they reach the age of 50, could, in theory, end up with £32,000 worth of bonuses, assuming they were fortunate enough to be able to pay in the maximum £128,000 over 32 years. Bonuses are not paid after the age of 50.

No doubt, many parents and grandparents will be passing money to the holder of LISAs so they can benefit. The government bonus dwarfs any interest or average investment returns on existing savings accounts, so many will be drawn to the simplicity and benefits of the LISA.  It is worth pointing out, that the income tax and inheritance tax implications of doing such deals with LISA holders should be considered before commencing. (For further information on Inheritance Tax see our website).

For further information on the LISA please see the Government factsheet here.

Is the Lifetime ISA (LISA) better than a pension?

Certainly, many will be attracted by the bonus and the fact that they can withdraw the money to buy their first home to live in, which is not possible with a pension.

The whole account can be withdrawn without any tax or penalty to pay after the age of 60, which is better than a pension where only 25% of the pot is available free of tax.

For those individuals in a workplace pension scheme, they benefit from their employer’s pension contributions as well as generous tax relief which is always at least as good if not more than the bonus in a LISA. So put simply, these individuals have more ‘free money’ going into the pension than in a LISA which means the fund will be that much larger at retirement.  In these situations, it would be more advantageous to have the LISA in addition to a pension.

For an individual with only rental and investment income, currently they cannot pay more than £2,880 into a pension each tax year. From next April, if they are under 40, they can contribute up to £4,000 into a LISA as well, providing them with £1,720 in ‘free money’ from the government.

What are the catches of the Lifetime ISA (LISA)?

If money is taken out of the LISA (unless it is over the age of 60, or to buy a first home), then the bonus must be repaid along with a 5% penalty. It may still make sense to save in a LISA over any other investment, if the interest earned or growth achieved is greater than the penalty.

The property value has to be less than £450,000 and the LISA must be open for at least a year before being able to make a withdrawal for a house purchase.

For those with a Help To Buy ISA, it can be transferred into the LISA and qualify for the bonus. It must be noted that the transfer cannot take place until 12 months after opening the Help To Buy ISA.

Before completing the purchase, you need to make sure, if you can, that you have contributed the full £4,000 in the tax year as you will qualify for the £1,000 bonus – it can be claimed before the end of the tax year to assist the purchase.

Additional Considerations

Consultation is on going on the ability to take loans from the LISA before age 60 without losing the bonus. No doubt, the rules will change during the lifetime of the ISA, just as they do with the current ISAs and pensions. Keep checking our website for further announcements before April 2017.

Michael Powell is a Financial Planner at Kirk Rice Accountants. For more information on this topic please feel call Michael on 01344 875000 or email info@kirkrice.co.uk.

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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.