Please note this is a totally new way to save and so this summary should be treated with caution but please contact us if you need independent financial advice on this or any other area.
In the March 2016 Budget the Chancellor announced the creation of a Lifetime ISA, started in April 2017. If you were under 40 at that time, you’ll be able to use it to save for your first home or your later years, and the state will add 25% on top – that’s £1 for every £4 saved.
This is essentially a no brainer for any first time buyer as the interest and the bonus you can get cannot be matched anywhere else. For saving for retirement, it will be a good option for some basic-rate taxpayers too.
This is a totally new way to save. The information isn’t complete yet and will almost certainly evolve, so please see this as a general guide, we will keep updating it as we learn more.
Who will be able to get a Lifetime ISA?
From April 2017, anyone at least 18 and under 40 at the time they open the account is eligible – meaning there will inevitably be some who just miss out. As the goal is both to help you save for a first home and for retirement, anyone who meets the age criteria can open one, even if you already own a home.
How much can I save in a Lifetime ISA?
You’ll be able to save up to £4,000 a year into the Lifetime ISA. For every £4,000 you save, the state will add £1,000 at the end of each tax year.
Before Lifetime ISAs launch, the Goverment is consulting on whether you should be allowed to save more than £4,000 each year into the Lifetime ISA (though you won’t get an extra bonus, even if it decides to allow it).
When do I get the bonus?
The bonus is paid at the end of each tax year that you are aged 18 to 50. It’s a maximum of £1,000, meaning you’ll need to have contributed £4,000 into the ISA to get the max amount. If you contribute less, and interest or investment growth takes the total up to £4,000, then you will only get the bonus on what you put in.
When withdrawing money – for a home, or if you’ve reached the age of 60 – any bonus for that tax year will be paid at the point of withdrawal.
As it’s paid every year, it means that you’ll be able to earn interest on the bonus, or get investment growth from it, in future years.
If you’re currently 17, and you open a Lifetime ISA on your 18th birthday (they will only become available from April 2017), you’ll be able to get a maximum £32,000 government bonus by the time you’re 50, assuming you save the maximum £4,000 per year, and future governments don’t change the rules.
When can I take the money out?
You can take all the savings, interest/investment growth and bonus out tax-free after your 60th birthday. If you’re buying a first home you can take it out at any point and get all the perks, as long as you’ve had it for at least a year.
But if you take the money out before you’re 60 without buying a first home, you get no bonus and there’s a 5% penalty on the amount you withdraw. In this scenario you can make a partial withdrawal and lose the perks on the amount taken, but continue to accrue them on what’s left in.
The Treasury is consulting over the coming year as to whether there should be penalty-free withdrawals if the ‘borrowed’ funds are fully repaid.
Can I invest as well as save?
Yes, the ISA is designed so that you can either save as cash and get interest, or invest (in stocks and shares) and – hopefully – enjoy growth.
Can I pay in to a Lifetime ISA and other ISAs in the same tax year?
Yes, you can, provided between them you don’t pay in more than £20,000 (the 2017/18 tax-year ISA limit, which could rise in future years).
You’ll be able to hold and pay into a Lifetime ISA, cash ISA, stocks and shares ISA and innovative finance ISA in the same tax year. Some may also be able to pay a Help to Buy ISA too, but see below for how the two interact.
Can I transfer cash from other ISAs into the Lifetime ISA?
Yes, but you would only be able to transfer £4,000 into the Lifetime ISA in any one tax year.
As with any ISA transfer, anything you’ve transferred from previous years’ ISAs does not affect your current tax year’s contribution.
So, if you transferred £4,000 into the Lifetime ISA from a previous year’s ISA in 2017/18 tax year, you’d still be able to deposit £20,000 into a cash ISA, stocks and shares ISA or an innovative finance ISA (or a split between two or three of these) within the same tax year, though you’d have used up your Lifetime ISA allowance for that year.
Similarly, you’ll be able to transfer cash between different Lifetime ISA providers to up the rate if you see a better deal. You can even hold more than one Lifetime ISA product, provided that you only pay in to one at any time in each tax year (you can transfer current year’s money around, provided it’s all transferred each time).
How do I use it to buy a home?
Firstly, you need to have had the Lifetime ISA open for at least 12 months to get any state bonus – so you’ll need to be planning to buy your first home in April 2018 or later to use this (if you’re planning to buy before this, see Help to Buy ISAs).
When you’re ready to use the savings to buy a qualifying home (costing £450,000 or less, located in the UK) you instruct your ISA provider you’re withdrawing the funds for a home purchase. It will then claim any outstanding bonus due from the state, and then will pay the amount of the withdrawal – including bonus and interest – to your conveyancer to use for the home purchase.
If you’re buying your first home with a partner, you can’t get a joint Lifetime ISAs as they’re designed for individuals. But, both of you can get one to double the bonus. To make it plain:
- If you’re a first-time buyer, buying with someone who’s owned before, you CAN BOTH open one, but ONLY YOU can use the state bonus for the home purchase.
- If you’re a first-time buyer, buying with another first-time buyer, you CAN BOTH open one. So, together, you can save £8,000 a year and gain a total bonus of £2,000.
If the property purchase falls through, the funds will go back to your bank or building society. This returning of funds won’t affect your annual contribution, you’ll still be able to contribute up to £4,000 in that tax year.
Which is better if I’m buying a home – a Help to Buy ISA or this Lifetime ISA?
Both give a bonus of £1 for every £4 saved but only up to £3,000 in total on the Help to Buy ISA, compared to £1,000 per year with the Lifetime ISA.
This is because the limits on what you can save are different – £2,400 per year in the Help to Buy ISA (£3,400 in year one), but it’s a higher £4,000 per year in the Lifetime ISA. What’s more, as the Lifetime ISA bonus is paid annually, you can earn interest on it, whereas the Help to Buy bonus is only paid when you buy a property.
The other advantage of the Lifetime ISA is that it allows you to use it to buy a home for up to £450,000. The Help to Buy ISA limits you to buying for £250,000 unless you live in London, which is £450,000.
However, if you’re buying before April 2018, you’ll need to stick with the Help to Buy ISA scheme, as you need to have had the Lifetime ISA open for at least 12 months before using it to buy a home.
You’ll be able to open a Help to Buy ISA up until 1 December 2019, at which point it will no longer be available to new applicants. You’ll be able to contribute to it until December 2030.
Can I merge the two?
If you’re buying a home, and you’re a first-time buyer, you can roll your Help to Buy ISA savings into this Lifetime ISA when it launches in 2017, or you can continue saving into both. However, you’ll only be able to use the bonus on one or the other when you use the funds to buy a home, not on both.
Oddly, the Government has given you only one tax year to merge the two – in 2017/18. Do this and you’ll receive the 25% bonus on both your Help to Buy ISA savings and your Lifetime ISA contribution at the end of that tax year.
It’s worth noting that any Help to Buy ISA funds that were saved prior to the 6 April 2017 Lifetime ISA launch and then merged in to a Lifetime ISA will not count towards the 2017/18 Lifetime ISA tax year limit (so you’ll still be able to deposit £4,000 in 2017/18). Anything saved in the Help to Buy ISA after this time and then transferred will eat in to the Lifetime ISA limit for that tax year.
Can I use the government bonus in a Help to Buy ISA AND a Lifetime ISA?
You can use your Help to Buy ISA with its government bonus to purchase your first home, and save your Lifetime ISA with its government bonus for retirement.
You can also continue saving into both in any one tax year.
Can I save into a pension and a Lifetime ISA?
Yes. The Lifetime ISA is designed as a boost to retirement savings, not a replacement. You can access the money in your Lifetime ISA tax-free from age 60.
How does it compare to saving into a pension?
Ideally, you’ll be able to save into both to maximise your retirement savings.
However, pensions and ISA savings are two different beasts. Both have their advantages, but if you’re making a choice there are some things you need to consider.
If you’re employed, it is basically a no brainer to save into your workplace pension. With autoenrolment, your employer must contribute towards your pension, plus you get tax relief of at least 20% (tax relief means that for every £4 you put into your pension, you get tax relief of £1 – the same boost as with the Lifetime ISA) – both of these together are worth more than the Lifetime ISA bonus. This is especially true if you’re a higher-rate taxpayer, as the tax relief provided will be then at 40%.
Alternatively, if you are self-employed or you want retirement savings you can access more flexibly than a pension (albeit with a penalty) then the Lifetime ISA is definitely a good alternative.
There are other advantages to pensions, though. If you lose your job, and need to then claim benefits, pension pots aren’t counted as part of your wealth. However, ISA (and LISA) savings are and would be, so you may have to use a decent proportion of the savings before you’d be eligible for means-tested benefits. Similarly, Lifetime ISAs could be forfeit to creditors in bankruptcy, whereas pensions are protected.
You can have this as well as a pension, but remember that this is money that you save from your after-tax income, unlike pensions, which are from your pre-tax income.
The real cleverness behind this for the Treasury is that if people use this rather than a pension, as it comes from taxed income, it gets the Treasury tax revenue now. If they put it in a pension, the Treasury has to wait years until it gets tax. So, this could be Mr Osborne cleverly grabbing cash out of future Chancellors’ pockets.
What happens to my Lifetime ISA between the ages of 50 and 60?
Unless you use the funds to buy your first home, you won’t be able to access the money in your Lifetime ISA for retirement income until you’re 60 (unless you forfeit the bonus and pay a penalty).
You’re likely to be able to continue to pay in to your Lifetime ISA between the ages of 50 and 60, though you won’t get the state bonus in these years. The Government is consulting over the coming year on whether to allow this as it finalises plans for the Lifetime ISA.
If it does allow it, then between ages 50 and 60 you’ll still be able to earn interest on the amounts you save then along with anything you have saved from before you were 50 (similarly, if it’s invested, you’ll benefit from any investment growth).
You’ll also be able to transfer the money between different ISA providers to up the rate whether it’s saved or invested.
Where can I open a Lifetime ISA?
They’re not available until April 2017, but they’ll be offered by banks, building societies and investment firms – depending on whether you opt for cash savings or investments in your Lifetime ISA.
Which providers sign up to offer them remains to be seen.
Will my savings in a Lifetime ISA affect my eligibility for benefits?
Quite simply yes, just as with savings and contributions to any other ISA.
I’m over 40 – so I’m locked out completely?
If you’ll reach 40 before 6 April 2017 then sadly you won’t be eligible for a Lifetime ISA. If you’ll hit it shortly after that date then you’ll need to be quick to open one.
If you have not yet bought your first home you may qualify for a Help to Buy ISA – there’s no upper age limit to get one of these although you only have until November 2019 to open one.
You can still put money away in a cash or stocks and shares ISA (plus the yearly limit for these will rise to £20,000 from April 2017). The new personal savings allowance (starting April 2016) may also help you make the most of your savings as it’ll allow you to earn up to £1,000 in interest tax free per year (£500 for higher-rate taxpayers).
You can also, of course, save into a private pension. New auto-enrolment rules mean that soon every employer (and most are already doing so) will have to contribute into your private pension.