The new tax year sees the launch of another Individual Savings Account (ISA) product. The Lifetime ISA can be opened by anyone aged between 18 and 39, and needs to be considered as an option when considering savings/investment or retirement planning needs for anyone in this age group.
Lifetime ISAs can invest in either stocks and shares, or in cash. The annual contribution limit is £4,000, leaving savers free to invest their remaining 2017/18 ISA allowance of £16,000 in other types of ISA.
Contributions to lifetime ISAs will be topped up by a Government bonus of 25%. Hence an additional £1,000 will be added by the Government for anyone who maximises their annual lifetime ISA allowance. The Government intends that a lifetime ISA should be used either to save to purchase a home, using a mortgage; or to save for retirement. Hence if the funds are withdrawn prior to age 60, and are not then used to fund the purchase of a home, then the saver will lose the Government bonus, plus the interest accrued on the bonus, and will also pay a 5% exit charge.
Funds can only be withdrawn to spend on the purchase of a home once the ISA has been open for at least 12 months. The property must also be worth no more than £450,000, and the saver must be a first-time buyer if they wish to keep the government bonus.
Savers can continue making contributions of up to £4,000 per tax year, and receiving 25% bonuses, until they reach the age of 50. The account can then remain open after age 50, even if nothing further can be added to it.
There have been fears that the introduction of Lifetime ISAs will result in people choosing to opt out of their workplace pension schemes, preferring instead the flexibility of a savings plan where there is an opportunity to access the funds prior to retirement. However, given that employers are compelled to make contributions to workplace pensions, it is unlikely to be good advice for anyone to leave, or refuse to join, their workplace pension simply to open a lifetime ISA.
Although it is unclear how many providers will offer the product, a lifetime ISA is a very good potential option for those wanting to make retirement savings contributions over and above the minimum workplace pension payments, or for people who are self-employed and hence have no workplace pension. For a basic rate taxpayer, the 25% lifetime ISA government bonus could be said to be similar to the 20% tax relief granted to pension contributions.
The Government has previously launched the Help To Buy ISA to aid savers in accumulating sufficient funds to raise a deposit on a home. It is still possible to open one of these ISAs, until November 2019 at least. These have no age restrictions, so unlike Lifetime ISAs, they can be opened by people who will be aged 40 or over on April 6 this year. However, Help To Buy ISAs only allow investment in cash, do not allow lump sum contributions, have maximum contributions of £2,400 per year (£3,400 in the first year), and can only be used to purchase homes worth £250,000 or less (except for London properties, where the maximum is £450,000).
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.