The new Lifetime ISA has launched, and it’s a complete no brainer for first-time buyers, as the state will add a 25 per cent bonus to whatever cash you manage to save. Those who max out their allowance stand to gain up to £32,000. It works the same way for pensions too, but more on that later.
This guide covers everything you need to know about the Lifetime ISA (LISA) including who should get it, who can get it, how best to use it, and all the best buy accounts (once they’ve officially launched).
How much can I save? – Up to £4,000 per year, and get a 25% bonus at the end of each year
Under the new rules you can save up to £4,000 a year into the LISA. The state will then add a 25 per cent bonus on top of that at the end of each tax year. Crucially, the £4,000 doesn’t have to be drip fed into the account, unlike the Help to Buy ISA. It can be paid as a lump sum if required.
How it works:
Say you save £2,000 into your LISA during the 17/18 tax year. At end of the tax year you’ll have £2,500 (including the state bonus). Save £4,000 and you’ll end up with £5,000. And all of that is before any additional interest paid by the banks.
- The bonus is paid until the age of 50
- It will be as a lump sum in 2017/18 then monthly from April 2018 onwards
- The bonus is only paid on your contributions – interest doesn’t count
- The absolute maximum bonus is £32,000 – but to get that you’d need to open an account at 18 and pay in until you were 50
Who can open a Lifetime ISA? – Anyone between 18-40 years old
The Lifetime ISA is available to those over 18, and under 40 years old on 6 April 2017. Those born before 7 April 1977 are unfortunately ineligible.
If you’re nearing 40 and thinking about opening a LISA, then you need to get your skates on. The account must be opened before your 40th birthday, and at present your options are limited.
Yes, it’s ageist, but since it’s not illegal to discriminate on age in the UK, there isn’t much you can do about. If you don’t qualify for a LISA, don’t own your own home, but plan to in the future, you might want to take a look at the Help to Buy ISA. They are being phased out, but you still have until 2019 to open one.
Do I have to be a UK citizen to open a Lifetime ISA? – In short, No
The Lifetime ISA is open to individuals living in the UK. You do not need to be a British citizen. However, if you move abroad you need to stop paying into the ISA, though you can keep it open, and start paying in again if/when you move back.
If you move permanently then you have three options. Either use the money to buy a UK residential property, wait until you are 60 years old, or pay a 25 per cent penalty to get hold of your cash early (effectively wiping out the state bonus and costing you 6 per cent on the money you originally saved).
How can I use the money? – Either towards a first home or towards retirement
The Lifetime ISA is designed to be used to either buy your first home, or cashed out once you reach 60, supposedly to go towards your retirement.
It’s the Government’s attempt at encouraging young people to start saving. It’s noted that many of those under 40 are happy to save for their first home, but less so about saving for their retirement. By combining these into a single scheme, the Government hopes that people will develop a savings habit that will carry forward into the future.
- You need to be buying a UK residential property costing £450,000 or less – buy to let does not count
- You must have never owned a property before
- The LISA must have been open for a year or more before it can be used – so it’s worth opening one even if you aren’t yet ready to save
- The money will be paid directly the conveyancer/solicitor dealing with your new home
- You need to be buying with a mortgage – cash buyers will face a 25% penalty for taking money out before the age of 60
- If buying with someone else who isn’t a first-time buyer, you can still use your bonus
Saving for retirement
- You can withdraw all or part of the cash from the ISA on or after your 60th birthday
- Unlike a pension, there isn’t any tax to pay on the cash you withdraw
- You don’t have to withdraw the money – you won’t get any additional bonus, but interest should continue to accumulate
- Lifetime ISA savings will affect your eligibility for benefits – unlike a pension
Can I have a Lifetime ISA and a Help to buy ISA? – Yes
The Help to Buy ISA was introduced back in 2015, with the aim of helping first-time buyers save for a deposit on a home.
Those savers who haven’t yet used their Help to Buy ISA might be thinking about transferring their savings into a LISA or even opening a separate account. Well, it is possible to have both, but you can only use the bonus from one of them towards buying a house.
Here’s how it plays out:
If you use the Help to Buy ISA for the 25 per cent bonus to buy a home, then you won’t be able to use your LISA savings to buy a property without taking a 25 per cent hit on them. You will however be able to access the cash once you hit 60 and still get the bonus.
Use the LISA for the bonus to buy a home, and you won’t get the bonus on your Help to Buy ISA savings, but you will be able to access the money without penalty.
Looking at the scenarios above, it would seem that if you have both, it would be better to use the LISA to buy a property (provided the account has been open a year). This is particularly true if the property you are interested in purchasing is outside of London, and costs more than £250,000.
Those considering transferring from a Help to Buy ISA to a Lifetime ISA should bear in mind that the Lifetime ISA must be open for one year before you can get the bonus. The Help to Buy ISA only requires that the account contains at least £1,600 (which is three months savings at the maximum rate). If you are planning to buy soon then it’s best to stick with the Help to Buy ISA.
For those wanting maximum flexibility, open a Lifetime ISA ASAP. As little as £1 will get the clock ticking on the bonus. In the meantime, continue putting money into the Help to Buy ISA.
If come, say March 2018, you still haven’t bought a home, you could then transfer your Help to Buy ISA savings to your Lifetime ISA. The transfer must be done before the start of the 2018/19. The good news here is that any money you put into your Help to Buy ISA before 6th April 2017, won’t count towards your £4,000 annual Lifetime ISA limit. So it you’ve been contributing the maximum about into your Help to Buy ISA in the 2017/18 tax year, you’ll still have £1,600 of your yearly Lifetime ISA limit remaining.
Should I invest in a Lifetime ISA instead of a standard pension? – Not in our opinion
The Lifetime ISA is in part designed to encourage young people to save for their future retirement. And while it’s not intended to be a replacement for a person, it has been touted around as such in circles, but there are some significant differences between the two.
Advantages of a pension of a Lifetime ISA
- Pensions can be drawn up on from the age of 55 vs 60 years for a LISA
- If you’re employed, your employer must contribute to your pension, they don’t in the LISA
- Savings in a pension doesn’t affect your benefit entitlement
- Savings in a LISA are considered assets and could be subject to divorce or bankruptcy proceedings; pensions are often protected
- Higher-rate taxpayers enjoy relief at 40 per cent in pensions; meaning a £100 contribution only costs them £60
Advantages of an LISA for retirement over a pension
- Withdrawals are tax free; pensions are often taken as a tax-free lump sum in part, then income tax paid on subsequent withdrawals
- If you’re prepared to take a 6% hit and miss out on the 25% bonus, you can access your LISA cash whenever you want; pensions are locked down until 55 in all but extreme cases
As you can see, pensions are clear winner here, financially at least, but it doesn’t have to be an either/or situation. You can have both a pension and a LISA and split your funds across both, so it's probably best to consider the Lifetime ISA as complementary to a pension scheme.
Should I get an Investment (stocks and shares) LISA or a cash LISA? – That depends on how you plan to use it
If you’re saving to buy your first home, then a cash LISA is probably the way to go. Your capital i.e. the money you pay in, is safe, and will earn interest from the bank.
Those saving for retirement however, might want to consider a stocks and shares LISA. If you are over 5-10 years away from retirement (which you’d have to be since you can’t open a LISA over 40 anyway), then it is generally considered worth taking some risk and investing your pension for higher returns.
Interestingly, investment LISAs are likely to available before cash LISAs are completely ready, so even those wanting open a cash LISA might want to place funds into an invest LISA to get the bonus clock ticking, and then transfer to a cash LISA once they become more widely available.
There is also the option of opening both an investment LISA and a cash LISA, though you can only open one per year, and only pay into one of them at any time. Still, this does allow you to split your risk.
The top Lifetime ISAs
We will update this once we get final word of when the banks and building societies plan to launch their LISA schemes. Rule clarifications were sent to providers on 27 March 2017, so it might take some time for products to appear on the market.
Cash Lifetime ISAs
Skipon Building Society is the first provider launch a cash Lifetime ISA. The interest rate is a paltry 0.50% and is paid annually. The account is accessible online, and accepts transfers. As per the LISA rules you must be aged between 18-39 to open it. The minimum pay in is £1 and maximum is £4,000.
Stocks and shares Lifetime ISA