Introduced on 6 April 2017, the Lifetime ISA allows anyone aged between 18 and 40 to save up to £4,000 a year and get a government bonus of 25%, so up to £1000 payable at the end of each tax year up to age 50.
What can the Lifetime ISA be used for?
The Lifetime ISA has been introduced to encourage saving with a dual purpose to help purchase a first home or for retirement from age 60.
How can it be used to save for a first home?
The savings in the ISA can be used to purchase a first home (not a buy-to-let property) worth up to £450,000.
Two first time buyers can both use their savings (including the bonus) when buying a property up to £450,000 together.
The savings (including the bonus) must not be greater than the purchase price of the property on completion.
There is an initial minimum holding period of 12 months from account opening before withdrawals, that include the government bonus, can be made for a home purchase.
The withdrawal amount must be paid to a conveyancer.
Withdrawn funds must be returned to a Lifetime ISA if a purchase has not been completed within 90 days of the funds being received by the conveyancer otherwise a withdrawal charge of 25% will apply.
How can it be used to save for retirement?
After the investor’s 60th birthday all the savings (including the bonus) can be taken out tax free. Withdrawals made when the investor is terminally ill can also be taken tax free before age 60.
Withdrawals made at any other time, will be subject to a 25% charge apart from the specified situations below.
The specified situations where a withdrawal charge may not apply include:
- Transfers between Lifetime ISAs;
- Removal of an invalid Lifetime ISA;
- Withdrawals to settle account fees charged by the ISA provider or arising from a default; or
- An act or omission not attributable to the investor.
What other things should be considered?
A pension is likely to be more appropriate when considering a regular savings vehicle which provides income in retirement. For example, if the investor has a work place pension which their employer contributes to or if they are a higher or additional rate taxpayer, relief of 40% and 45% could be received on pension contributions which is something an individual would not benefit from through a Lifetime ISA.
Continuing uses for the other 5 ISAs
The number of ISA’s available to an individual continues to grow, each of which have their place in the market.
Cash ISA: Investors who require an emergency cash fund or have a short term financial goal (less than five years).
Help to Buy ISA: First time buyers saving for a deposit can open a Help to Buy ISA until 30 November 2019. Amounts in a Help to Buy ISA on 5 April 2017 can be transferred into a Lifetime ISA during 2017/2018 and earn a government bonus without the transferred amount counting towards the £4000 Lifetime ISA limit.
Stocks and shares ISA: Investors who have a medium to long term financial goal (at least five years).
Innovative Finance ISA: Investors who require higher interest rates than those offered on cash ISAs via peer-to-peer lending.
Junior ISA: Parent and grandparent investors who are saving for a child’s future.
The Lifetime ISA seems to offer limited benefits for most investors. Obtaining financial advice is important to ensure that the best method to invest for retirement and other goals is chosen.
Old Mutual Wealth have made the decision not to introduce a LISA to our proposition. We already have a flexible pension product for retirement savings in the form of the Collective Retirement Account which caters for our target customers, alongside our range of investment products, which facilitate withdrawals without penalty (excluding tax considerations).