Lifetime ISAs: help to fund the purchase of your first home or your retirement
To help younger people face the challenge of buying a first home there have been a number of government incentives introduced. Recently, as part of the Chancellor's Budget, a new tax efficient flexible savings option called the Lifetime ISA (LISA) – which provides support to those saving for retirement too - has been introduced.
So what is a Lifetime ISA (or LISA, for short)?
It’s an account that will be available, from April 2017, from banks, building societies and investment managers to allow people to save money (up to £4,000 a year) and then benefit from a 25% bonus from the government on those savings – up to £1,000 per year. The bonus (along with the savings) can then be used to purchase a first home or for retirement. And, because the bonus will be added each year, LISA account holders will not only gain interest on their savings but the bonus too as the years progress.
Are there age restrictions?
Yes. You can only take out a LISA if you are aged between 18 and 40 (@ 7 April 2017) but, once you have one, you can continue to benefit from the government bonus on contributions made to the account until you are aged 50.
If you do not use the savings and bonus to fund the purchase of a first home, it has to remain in the account until you reach 60 years of age – to support you in retirement.
What happens if I want to use the LISA to purchase a home?
You can use the LISA to save for a deposit on a first home – up to the value of £450,000 – but you’ll need to have saved for at least 12 months in the LISA before being able to do this. Provided that it is the first home you have bought, it is your only residence and it is not being used for buy to let purposes, the savings and bonus will then be paid to your mortgage lender on completion of the property purchase via your solicitor or conveyancer.
As it’s a Lifetime account, you can then continue to save in to the LISA – with bonuses continuing to be paid up to the age of 50 – and then withdraw the money in it after the age of 60.
If you are an existing homeowner, you’ll only be able to use the LISA for retirement – not for house purchase.
What happens if I want to use the LISA to save for retirement?
Your savings, bonus (applicable up to the age of 50 only) and any interest on these can be withdrawn from the age of 60 – either as a tax free lump sum or as a tax free income. Partial withdrawals can also be made meaning that any savings remaining in the account will continue to benefit from the interest paid and then, unlike some other pension schemes, these will be paid tax free.
What if I have an existing Help to Buy ISA?
Provided that your do not exceed your current ISA allowance i.e. the amount you are allowed to invest in ISAs in any one year, you can have both a Help to Buy ISA and a LISA. It’s worth pointing out, however, that only one of these ISAs can then be used to help to purchase a property. Alternatively you could consider transferring your savings under any existing Help to Buy ISA into a LISA (*).
It’s worth noting here that with the ISA allowance being increased to £20,000, from April 2017, (the same time as the LISA Is being introduced) there should be greater flexibility to those looking to invest in ISAs – whether cash, stocks and shares or a LISA.
Also worth knowing…
If you are buying your first home with someone else you can both benefit from having a LISA - using your individual savings and bonuses from each to put towards a deposit for a house.
If you want access to your savings early it’s important to consider that, as a LISA account holder, if you want to withdraw your savings (other than when buying a first home or before you are age 60) you will have to return the government bonus including interest on it AND pay a 5% charge. You’ll still have access to your savings and any interest earned on those savings – but it will be minus the small charge.
In the future it’s possible that the government may find a way to give account holders the flexibility to borrow funds from their LISA without incurring a charge provided the ‘borrowed’ funds are fully repaid. It’s worth looking out for details on this as the month’s progress towards the official LISA launch in April 2017.
It’s important to shop around to find the best LISA deal. As with Help to Buy ISAs different banks and building societies will offer different interest rate deals so it’s worth spending time to find the best ones. If you do open a LISA and then find a better deal, however, you’ll still be able to change to a different supplier – allowing at least 30 days with each supplier.
If you don’t want to wait – If you haven’t yet bought your first home and want to take advantage of government incentives sooner, or don’t qualify for a LISA (perhaps because of your age) you may still be able to get a Help to Buy ISA. These are available now and until November 2019, have no upper age limit and, provided you qualify, the savings under them can still be transferred to a LISA once launched as mentioned above (*).
If you want to know more - LISAs are not due to be launched until April 2017 so it is possible that more news and developments on them will be announced but, in the meantime, should you require further information it might be worth taking a look at the government's guide.