Lifetime ISA: earn a government bonus of up to £1,000 a year 

You could receive up to £1,000 from the government each year to put towards buying your first home, or to boost your savings for retirement.

How does the lifetime ISA (LISA) work?

The LISA is a tax-free ‘wrapper’ that lets you put away up to £4,000 each year, either to purchase your first home, or to save for later life. Qualifying contributions will benefit from a 25% government bonus, up to an annual maximum of £1,000.

Let’s say you save the full £4,000, you’ll receive a bonus of £1,000, giving you a total savings of £5,000. If you open a LISA at age 18 and make maximum contributions every year until the age of 50, you could earn up to £32,000 from the government.

Contributions can be in cash, so you’ll get interest, or in stocks and shares investment, so you’ll get growth (or loss) and dividends; all gains are free from income and capital gains tax. The bonus will only be paid on contributions, not on interest or stocks and shares growth.

When investing in stocks and shares, the return is non-guaranteed, meaning your money is at risk. Stocks and shares LISAs are not generally appropriate for those who are looking to invest for only a short period of time, for instance, if you’re planning to buy a house in the next couple of years.

The £4,000 LISA limit will count towards your annual ISA allowance, which is currently £20,000 and will stay the same in 2018/19. You must be aged between 18-39 in order to open a LISA and you can continue to contribute and receive a government bonus until the age of 50.

Are there penalties?

Until 5 April 2018, the first year that LISAs are available, there will be no penalty for withdrawing your funds, regardless of what you’re using the money for. However, you won’t have received the government bonus either, as the first payment will not be put into your account until the end of the tax year. After this, the bonus will be paid monthly.

The money held within a LISA should be for the purpose of buying your first home, or to save for retirement. You can keep the same LISA account open if you purchase a home and continue to save into it, accessing your money once you hit 60.

Withdrawals for any other reason, unless you die or are terminally ill, will come with a 25% penalty. It’s important you understand that this isn’t just the government taking back the bonus, but will result in a loss equivalent to just over 6% of your savings.

If you die, any money held in your LISA, including interest and bonuses, is passed onto your beneficiaries without penalty.

Buying your first home

In order to use the money in your LISA for the purchase of a home, without incurring a penalty, the following needs to apply:

  • You must be a first-time buyer. You cannot have owned a property before, whether inside or outside of the UK. This includes owning a property (or a share of one) that you have inherited, even if you didn’t live there
  • You’ll need to buy a property that costs £450,000 or less, with any residential mortgage. As a LISA is intended to help you buy your first home, you’re not supposed to rent it out
  • The property must be bought at least 12 months after you’ve opened your LISA. If you need to buy sooner than this, the Help to Buy ISA is an alternative option

Can I transfer my Help to Buy ISA?

For the 2017/18 tax year only, you can transfer the value of your Help to Buy ISA as a single transfer and it won’t count towards your 2017/18 LISA allowance. This needs to have been completed by the end of the tax year (5 April 2018). After this, you’ll only be able to transfer Help to Buy ISAs up to the annual LISA limit of £4,000.

Although you can save into a Help to Buy ISA and Lifetime ISA at the same time, you can only use one account to buy your first home, so it could pay to consolidate.

Buying together

There is no such a thing as a joint LISA, so you and your partner will need to open separate accounts. You can use both of your savings and government bonus to purchase the property. However, the £450,000 cap is strict and will not double for partners buying together.

Saving for retirement

As well as saving for a first home, the Lifetime ISA can also be used to save for retirement. Here’s how the LISA rules currently stand for accessing these savings:

  • You can access the cash from your LISA at age 60. You don’t have to take it all at once, with the option to make partial withdrawals
  • If you leave the money in your LISA, it will continue to attract interest or investment growth/loss, as it will remain an active product once you have reached age 60
  • You don’t pay tax on withdrawals. All money taken out of a LISA is tax free. However, with a pension you save from gross (pre-tax) income, whereas with a LISA you save from net (after-tax) income

In most cases, using a pension scheme to save for retirement is likely to be a far better option. If you plan to use the LISA to fund your retirement, it should perhaps be considered as a complementary measure, rather than an alternative to a pension. This is for a number of reasons:

  • If you’re employed, auto-enrolment means your employer has to match some of your contributions in a pension, but in a LISA, they don’t. This is a valuable benefit of pensions
  • The 25% government bonus available with the LISA is equivalent to the basic-rate tax relief on a pension. However, for higher-rate tax payers, tax relief on pension contributions is 40%, meaning you’ll have to contribute less to see the same amount in your retirement fund
  • LISA savings will affect your eligibility to means-tested benefits, whereas a pension won’t. If you become unemployed, you may need to withdraw your LISA savings (paying the withdrawal charge) and live off this money before you are below the means-testing threshold
  • You can currently take money from your pension at age 55 (this will slowly rise to 58). You must be aged 60 to withdraw retirement savings from your LISA without penalty. However, this does mean that while you can’t take money from a pension early, you can with a LISA, if you’re prepared to pay the 6% hit. Pension withdrawals can be made early if you die or are critically ill. The same goes for LISAs, if this happens you won’t pay the penalty

Generally, unless you’re a self-employed, basic-rate taxpayer, using the pension to save for retirement is likely to be a much better option than the LISA. This is due to the employer contributions and higher rates of tax relief for higher and top-rate tax payers.

Can I change providers?

Yes. Once you’ve opened a LISA, you don’t have to stick with the provider you picked at the start. You can transfer the current year’s money around, provided it's all transferred each time. If you need advice on changing providers, get in touch and speak to one of our advisers.

The Lifetime ISA could be a valuable benefit for some savers. Whether it’s the right option for you will depend on your personal circumstances. If you would like to learn more about LISAs, or to discuss your financial portfolio, give us a call to speak to an independent financial adviser, or fill in an enquiry form and we’ll be in touch.

The most suitable course of action is dependent upon individual circumstances and professional advice should be sought. Taxation is subject to change.


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