By Will Davies
In the recent budget, Chancellor George Osborne announced a new option for savers in the form of the Lifetime ISA. The Lifetime ISA is due to launch on 6 April 2017, but what exactly is it and which individuals are eligible to save via it?
What is it?
The Lifetime ISA will be a savings account that will allow individuals to save for either the deposit on their first property, or for their retirement, without being taxed on any interest accrued. There is no minimum or maximum monthly contribution but savers can only save up to £4,000 per year with the Lifetime ISA.
Who is eligible?
Anyone aged between 18 and 40 from 6 April 2017. If you fall outside of this age bracket, then the Lifetime ISA will not be available to you.
Why is the Lifetime ISA an attractive option?
Firstly, as with all ISA products, any interest earned is tax free. Secondly, and perhaps most importantly, the Government has committed to boosting your total yearly savings by £1 for every £4 saved. This bonus will be added to your savings pot on an annual basis, allowing you to earn interest on it. So, if you were to save the maximum amount of £4,000 in a year, the Government would award you with a bonus of £1,000. This would carry on for every year you had the Lifetime ISA.
Who should consider it as a savings option?
First-time home buyers – after saving via the Lifetime ISA for a 12 month minimum, individuals can use their savings for the deposit on a house up to the value of £450,000.
Savers looking for retirement savings options – the Lifetime ISA is not a pension but is an option for those looking to save for their retirement and for an account that is inaccessible prior to the age of 60.
For those couples who are considering a Lifetime ISA as the means to save for a deposit on a house, it is worth remembering that as long as neither of them has previously owned or inherited a property, they both can open a Lifetime ISA – giving them a double bite of the bonus cherry.
Many first-time buyers may have already started saving via the Help to Buy ISA; you will be able to run both ISAs concurrently as long as you do not exceed the ISA allowance - £20,000 for 2017/18. Alternatively, you could look to transfer your Help to Buy ISA once the Lifetime ISA is launched. One difference worth nothing between these two ISAs is the discrepancy in the value of property a first-time buyer can purchase before they lose any bonus their savings have accrued - £450,000 for the Lifetime ISA and £250,000 (up to (£450,000 for properties in London) for the Help to Buy ISA.
For savers looking to boost their current pension arrangements, the Lifetime ISA has a number of attractive features. Unlike pensions, individuals will not be taxed when they draw down funds from their Lifetime ISA and can look to make partial withdrawals too. If you decide not to withdraw the funds at 60, you will still accrue interest on the account.
If you choose to opt out early from the Lifetime ISA, then you won’t be eligible for any of the bonuses you may have accrued or the interest received on those bonuses. Lastly, as the guidelines currently stand, you will be liable to a 5% penalty fee on the amount you withdraw. The rules surrounding early withdrawal and penalties will be confirmed in autumn 2016.
Both of the new ISAs represent great value for money given the bonuses that they pay, however choice brings with it some complexity, so we’d always recommend that you get advice when taking long term investment decisions.