The 2017 – 2018 tax year cycle has not only brought about an increase in the maximum you can save into an Individual Savings Account (ISA) to £20,000, but also a new ISA offering, the Lifetime ISA (LISA). The LISA has been introduced to help those aged between 18-39 save for their first home and/or for retirement.
How Does the Lifetime ISA work?
To be eligible to open a LISA you must be aged between 18-39. Providing you register prior to turning 40 you can put up to £4,000 each year into your LISA until you’re 50, this can be both as stocks and shares investments or cash savings. As with other ISAs, any interest, income or capital gains from investments held in a LISA are tax-free.
On top of your LISA deposits, the government will contribute an additional 25% bonus to your savings (capped at a maximum of £1,000 a year). This bonus will be paid at the end of the 2017/18 tax year, and then on a monthly basis in subsequent years. However, your savings and the government bonus must either be used towards a deposit on your first home worth up to a value of £450,000 or you must wait to withdraw it as a pension after you turn 60.
Lifetime ISA in 5 Bullet Points:
- Contribute up to £4,000 a year.
- Any contributions prior to your 50th birthday will receive a 25% top-up bonus from the government.
- The maximum bonus is £32,000 (i.e. if you open it at 18 and save the full £4,000 each year until you turn 50).
- Until 5th April 2018 withdrawals are free, after that you will pay a penalty.
- Once opened, it’s free to transfer to any other LISA provider.
Should you Invest in a Lifetime ISA?
As with any form of investment, the value of your money can decrease as well as increase when you invest in a Lifetime ISA. To help you decide whether this form of investment is for you, we’ve listed the advantages and disadvantages, along with a list of questions to ask yourself before investing:
Advantage – First-Time Buyers
If you are a first-time home buyer, and know for certain that you are both eligible for the LISA and plan to use your LISA savings for a deposit on your first home any time after 12 months from opening the account. With the government contributions it simply means you may be able reach your target more quickly than you would’ve done previously.
Advantage – 25% Government Bonus
The LISA contribution bonus of 25% on top of your investment sum will be paid every year until you turn 50. Ultimately, if you opened a LISA at 18 and contributed the full amount until you turn 50 you could receive £32,000 for free on top of your investments.
Advantage – Free Transfers
You are be able to transfer your LISA between different provides if interest rates change and you find another provider. This is true for both the current stocks and shares LISA available, and the incoming cash LISA. You can also hold more than one LISA, providing that you only pay into one at any time during each tax year.
Disadvantage – High Withdrawal Fees
If an investor decides to withdraw the cash from their LISA and spend it on anything other than buying a new home, or before they turn 60, they will be liable to repay all government bonus contributions as well as an additional 5% early withdrawal charge.
Disadvantage – Higher-rate Tax Payers Benefit More from a Pension
A higher rate taxpayer in the UK (anyone paying in the 40% tax-band or above) will be better off with a pension, as their tax-relief will be higher up until they reach their allowances – £40,000 (Annual) and £1,000,000 (Lifetime).
Disadvantage – Limited Provider Choice
Currently there are only three providers of the LISA, none of which are banks or building societies. The three providers available: Nutmeg; Hargreaves Lansdown & The Share Centre also only offer the LISA as a stocks and shares ISA, with no current offering of a cash ISA option from any provider.
Need to Know – What If You Need to Withdraw?
Any funds withdrawn or transferred to another ISA from the LISA will be subject to a withdrawal charge of 25% of the amount you withdraw. However, this withdrawal charge will be waived if you’re:
- Transferring to a LISA with a different provider
- Aged 60 (or over)
- Terminally ill with less than 12 months to live
- Using it towards the purchase of a new home
Questions to Ask Yourself Before Investing in a Lifetime ISA?
- Are you prepared to lose 25% of your savings, should you need to make a withdrawal? Any money that you withdraw from the LISA before the age of 60 or for anything other than paying for your first home will lose the government bonus, as well as any interest or stock market growth and be subject to an additional 5% charge.
- Are you paying income tax rates higher than 40%? If so you may well be better off saving into a pension with the additional government and employer contributions.
- Are you planning to buy a home within the next five years? If you are not planning on making this investment
Lifetime ISA Providers.
So who is currently offering the Lifetime ISA?
The Share Centre
Investing in or lending to early stage businesses involves a high level of risk, including illiquidity (inability to sell assets quickly or without substantial loss in value), lack of dividends, loss of capital and dilution risks and it should be done only as part of a diversified portfolio. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Your capital is at risk.