Coco Chanel stated “The best things in life are free. The second best things are very, very expensive.”
Based on this benchmark, one of the best things in life will soon be the Lifetime ISA.
So why is the Lifetime ISA soon to be one of the best things in Life?
It is free money. From 6 April 2017, anyone aged between 18 and 40 will be able 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. Where else can a 25% return on savings be achieved?
In order to understand why the Lifetime ISA is a must, particularly for first time buyers, we need to consider three main things. What is the Lifetime ISA?, What the Lifetime ISA can be used for? What other things should be considered? A reminder of when the other five ISAs may be used is also contained below.
What can the Lifetime ISA be used for?
The Lifetime ISA will be 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 will be 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Withdrawn funds must be returned to a Lifetime ISA if a purchase has not been completed within 90 days of the funds being received by the conveyancer otherwise a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.
Why is using a Lifetime ISA a must for first time buyers?
The government will add 25% free money into the account of First time buyers intending to purchase their house after 6 April 2018.
What other things should be considered?
If the Lifetime ISA is to be used for retirement planning then a pension may be more appropriate, 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 and relief of 40% and 45% could be received on pension contributions instead.
Continuing uses for the other 5 ISAs
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.
Whilst the Lifetime ISA is a must for first time buyers, it seems to offer limited benefits for other investors. This article underlines the importance of obtaining financial advice to ensure that the best method to invest for retirement and other goals is chosen.