This week saw the introduction of the new Lifetime ISA, we have had a number of enquiries from clients interested in learning more so I thought it would be a useful topic for this week’s blog.
What is a Lifetime ISA
The Lifetime ISA (being referred to as the Lisa) was announced by George Osborne in his 2016 budget as an investment vehicle for a younger generation of savers wishing to save for a first home or save for retirement. Only those aged between 18 and 39 are eligible to open a Lifetime ISA.
The overall ISA allowance has been increased to £20,000 this year (from £15,240 in the 2016/17 tax year) and any Lifetime ISA contributions will count towards this overall limit.
Anyone who takes out a Lifetime ISA can save up to £4,000 each tax year and they will receive a government bonus of 25% of their contribution. So if you contribute the maximum £4,000, you will receive a further £1,000 from the government.
There are two key situations when savers can access Lifetime ISA savings:
• Savers will need to wait for at least 12 months have passed from first paying in to the account, after that time thy can access savings to help buy a first home worth up to £450,000 in the UK. If you are buying jointly, both purchasers must be first time buyers.
• From the age of 60
It is also possible to access savings without penalty if you are diagnosed with a terminal illness.
If savings are accessed outside of these situations, a 25% early withdrawal penalty will apply and the below example shows how this can result in a saver being left with less than the amount they put in.
Initial investment: £4,000
Government bonus (25%): £1,000
Total account value in year 1: £5,000
Early withdrawal: £5,000
Early withdrawal penalty (25%): £1,250
Consumer receives: £3,750
Lifetime ISAs are theoretically available as cash or stocks and shares ISAs depending on the provider so it is possible for investors to take a higher level of risk in pursuit of higher potential returns. One note of caution here is that if you are saving for a first home and you intend to access capital within 3 to 5 years, taking risk with your capital is not advised. Although returns on cash are lower, you don’t want to be caught out by falls in stock markets that result in you losing a chunk of your house deposit.
Who is Offering Lifetime ISAs
Only a relatively small number of providers have confirmed that they are planning to offer Lifetime ISAs and there are currently only a few products available from providers such as Nutmeg, Hargreaves Lansdown and The Share Centre. The focus seems to be on stocks and shares and we couldn’t find any cash based Lifetime ISAs available yet.
Lifetime ISAs are the sixth category of ISA now available to us. Other ISA options include:
• Cash ISA
• Stocks and Shares ISA
• Innovative Finance ISA
• Help to Buy ISA
• Junior ISA
In theory you can transfer savings from a help to buy ISA in to a Lifetime ISA but again this will be subject to providers offering this facility. Whether or not this is appropriate will also depend on the amount you expect to save and when you are likely to be buying your first home.
If you are considering using a lifetime ISA to assist with retirement savings it is important to consider whether you might be missing out on preferential tax relief and/or employer contributions from traditional pension arrangements.
To avoid choice paralysis it is important to focus your financial planning on the ‘bigger picture’ rather than getting bogged down in the detail of specific financial products or solutions. While it is useful to understand the product options available to you, we advocate financial planning by first designing the life you want to lead, then building the financial infrastructure to support that life rather than working the other way around.
The information covered in this blog does not represent personal advice. If you would like to speak to us for more information please e-mail firstname.lastname@example.org.