How the new Lifetime ISA works
TIM BENNETT LOOKS AT THE KEY FEATURES OF THIS NEW SAVINGS PRODUCT AND POINTS OUT SOME OF THE HIDDEN PITFALLS.
How Lifetime ISAs work
From 6th April a new savings product was released – the Lifetime ISA (LISA). Here is a short summary of its key features.
Why the government launched the LISA
The aim of this product is to encourage young people to save both for their first property and also their retirement, all within the same wrapper. To encourage take-up there is a bonus system attached to a LISA, albeit with some strict conditions.
Who can have one?
This product is available to anyone who is a UK resident and aged 18-40 at the time the account is opened. Provided the account is opened by your 40th birthday, you may carry on contributing up to the age of 50. You may also open a LISA if you already have an existing ISA or private pension, such as a SIPP.
How it works
Like a standard ISA, a LISA is just a tax-wrapper for a mixture of cash and/or investments chosen at the discretion of the account holder. Unlike a standard ISA, however, a LISA pays a government bonus of 25% of the amount invested up to an annual maximum of £1,000 (based on a maximum contribution from you of £4,000) and a lifetime maximum of £32,000, assuming the current rules don’t change. This bonus is then available to be withdrawn for one of only three reasons;
- A first time property purchase of a property not exceeding £450,000 in value
- Retirement from the age of 60
- Death or the diagnosis of a terminal illness
Any other withdrawal will attract a penalty equal to any bonuses received plus interest or growth thereon plus a 5% surcharge. In short, you will be hit with a total penalty of 25% of the value of the fund at the point the withdrawal is made. It is this aspect of this new product that requires careful consideration before opening an account.
Which is better – a LISA, an ISA or a SIPP?
Whilst the chance of earning a government bonus is attractive, the penalties that apply, plus the tax breaks that are attached to other savings products, mean that the decision to open a LISA in place of say a standard ISA or a personal pension must be taken with care. Some of the key criteria are summarised below and we would suggest that you seek further advice from an Investment Manager or Wealth Planner before deciding.
| Product | Lifetime ISA | Investment ISA | Personal Pension |
|---|---|---|---|
| Minimum age | 18 | 18 (adult ISA) | 18 (adult SIPP) |
| Maximum age | 39 to open, 49 to contribute | No | 75 (for tax relief) |
| Basic rate tax relief on contributions @20% | No | No | Yes |
| Higher rate tax relief on contributions | No | No | Yes |
| Tax free growth within the wrapper | Yes | Yes | Yes |
| Government bonus on contributions @20% | Yes, capped at £1,000 per year, £32,000 total | No | No |
| Tax-free withdrawals | Yes | Yes | First 25% only |
| Penalty-free withdrawals | Subject to conditions | Anytime | From 55 (57 from 2028) |
| Penalty rate | 25% of total fund | n/a | 55% (if over the lifetime allowance) |
