James Sharp reports on the new Lifetime ISA
I recently attended a seminar in Edinburgh to learn more about the proposed introduction of the Lifetime ISA (aka LISA) in April 2017.
The LISA was announced in George Osborne's budget back in March and has been evolving ever since. The LISA will only be available to those aged from 18 to 40 (although this may still be varied) for people looking to save for their first home and/or retirement.
All adults under the age of 40 will be able to open a LISA and pay in up to £4,000 each tax year. They will be able to continue making contributions up to the age of 50. The government will add a 25 per cent bonus to these contributions. This means that individuals who save the maximum will receive a £1,000 bonus each year from the government.
The accumulated funds can then be then used to help buy a first home worth up to £450,000 at any time from 12 months after first saving into the account. The funds, including the government bonus, can be withdrawn from the Lifetime ISA from age 60 tax-free for any purpose. Lifetime ISA holders can also access their savings if they become terminally ill. Savers will also be able to make withdrawals at any time for other purposes but with a 25 per cent government charge applied to the amount of withdrawal. This returns the Government bonus element of the fund (including any interest or growth on that bonus) with a small additional charge applied.
The LISA has come under fire by some in the pensions industry in respect of its use as a vehicle for saving for retirement. The main concern is that people may use their LISA rather than a workplace pension with the result being a lower retirement income as people miss out on employer pension contributions. There are also concerns about the penalties for withdrawals. A number of firms have warned that penalties are too harsh which has caused some firms to delay the launch of the LISA or to not offer them at all, such as the Nationwide Building Society.
However, we feel that the LISA is likely to be popular given the Government contribution. It also provides more flexibility to a person's overall pension strategy. One possibility that I had not been aware of previously is that during the 2017-18 tax year only, those who already have a Help to Buy: ISA will be able to transfer any funds (including interest) built up before 6 April 2017 into a Lifetime ISA without these counting towards the Lifetime ISA contribution limit. They will then receive a 25 per cent Government bonus on the full value of the transferred funds.
Although there is still much detail to be clarified and it may yet be delayed, it looks highly likely that the LISA will form part of the ISA universe from the start of the next tax year on 6th April 2017.
James Sharp hopes to offer the LISA product to our clients alongside our existing Self-Select ISAs as part of the increased £20,000 ISA allowance for the 2017/18 tax year.
Please be aware tax treatment depends on individual circumstances and are often subject to change. Please consult an appropriately qualified professional before making any decisions about how some of these recent changes may affect you.