Comments Off on LISA savers face losing their £1,000 bonus
The Lifetime ISA (LISA) which launched in April 2017 enables savers to subscribe up to £4,000 a year and receive a government bonus of 25% of the money saved every year until age 50.
Anyone from 18 to 39 is able to open a LISA and the funds are accessible, penalty-free and tax-free, either at retirement from age 60, when you buy your first home valued at £450,000 or less or if diagnosed with a terminal illness.
For the first year only the government bonus will be paid annually (i.e. at the end of the first year) but will be paid monthly thereafter.
However, for those who invest the maximum of £4,000 in the first year and then buy a house before that 12-month bonus arrives, they will lose the £1,000 bonus – you must keep the LISA for 12 months to attract the bonus.
An interesting point is that existing savers with a help-to-buy ISA can transfer this to a LISA and get a full 25% bonus on the transfer!
While the introduction of these new savings products had initially been welcomed, the detailed rules are in fact quite complicated and could result in costly consequences for savers. With this in mind, for the LISA it may still be worth opening the account but just being aware that a bonus may not be earned in the first year if an early house purchase takes place. And, for the help-to-buy ISA, it may be advisable for individuals to wait until near the end of the tax year before they transfer it to a LISA.
My son will be 18 and I want to pass him £4,000 soon in recognition of his achievements?
It’s impossible to suggest the most suitable investment without understanding a person’s needs in detail. However, I believe the new Lifetime Individual Savings Account (LISA) is worth consideration and there are already a variety of deposit and investment options within ISAs. The LISA was available from 6th April 2017 and is very attractive to anyone under the age of 40. The government will pay a bonus of 25% of the contributions made each tax year and this is available until age 50. Anyone born on or after 7th April 1977 will be able to open a LISA, but note those born in April 1977 had to have opened the LISA on launch day or very soon after. If a LISA starts at age 18 as much as £32,000 in bonuses is available if saving £4,000 each year to age 50. Of course I suspect the rules may change during the lifetime of the ISA, just as the current ISAs and pensions do.
LISA offers an alternative to a pension and assists people when buying their first home as long as the property value is less than £450,000. The account must be open for at least a year before being able to make a withdrawal for house purchase. At the date of the property purchase the LISA provider will also claim a bonus for the current tax year savings so it will be beneficial to ensure savings are maximised prior to completion of the purchase. There will be a withdrawal penalty for any money taken out of the account before the age of 60 unless it is being used in first time home buying. The government will want the bonus back and a 5% penalty. Consultation is on going on the ability to take loans from the LISA before age 60 too, so you do not lose the bonus. Look out for further announcements before April 2017.
Young savers will benefit from 2 incentivised savings products: auto enrolment at work (receives employer contributions and government bonus) and LISA (just a government bonus). Both are tax free in life, but auto enrolment schemes cannot be withdrawn from prior to age 55 (just 25% is tax free when you do) whereas a LISA is wholly tax and penalty free from age 60. It would not be surprising to find LISA is offered alongside workplace pension schemes in the future.
If you have any questions regarding the LISA or any other Financial Planning queries please contact us.
The recent Budget announcement regarding the introduction of a Lifetime ISA (LISA) from April 2017 has given us plenty to think about with regard to the future of saving strategies.
We first came across the LISA back in 2014, when Michael Johnson, a research fellow at the Centre for Policy Studies thinktank, said that the Government should transform individual savings accounts into lifetime savings accounts which would incorporate both ISA-like and pension-like features.
The LISA will enable those who are under the age of 40 to save up to £4,000 in each tax year with the added benefit of the government providing a 25% bonus on the contributions paid in a tax year at the end of that tax year. This means that where the maximum saving of £4,000 has been made, the government bonus will equate to £1,000, bringing the amount invested up to £5,000 in the first and subsequent years. There will be no monthly cap on subscription amounts.
Savers will be able to make LISA contributions and receive the government bonus from the age of 18 up to the age of 50. So effectively someone who opens an account aged 18 will be able to secure lifetime savings of up to £160,000 (i.e. £128,000 saved by them and £32,000 as government bonuses). At age 50, permitted contributions can continue but there will be no government bonus payable.
Opening a LISA will be almost identical to opening a standard ISA – so an LISA manager will apply their normal account opening process which would generally include asking for the appropriate identity documents which prove the savers date of birth, National Insurance number, proof of address etc. It will also be possible for savers to open more than one LISA in their lifetime, but they will only be able to pay into one LISA in a tax year – thus the rules appear to align with the standard ISA.
The aim of the LISA appears to be two-fold – it is intended that savers will either use the funds to buy a residential property as a first time buyer or to provide an alternative or an additional retirement fund.
Tax-free funds, including the government bonus, can therefore be used to buy a first home worth up to £450,000 at any time from 12 months after opening the account. If the house is being bought with someone else, both purchasers can use a LISA and each benefit from the government bonus. The rules are based on the rules applicable for the Help to Buy ISA, so any withdrawal must be for a deposit on a first property – so effectively the withdrawal together with the government bonus will be paid directly to the conveyancer.
In other cases, while money can be withdrawn at any time, if it is withdrawn before the investor turns 60, the government bonus (together with any interest and growth on the bonus) will be lost and a 5% charge will be payable. From age 60, full or partial withdrawals can be made and will at that time be paid free of tax. If funds remain invested, any interest and investment growth will be tax-free. There are exceptional circumstances in which it will be possible to make withdrawals earlier, for example, terminal ill-health – the definition of which will align with that used for pensions.
For inheritance tax (IHT) purposes, the LISA will have the same treatment as other ISAs. Therefore, on the savers death, the funds will form part of the deceased’s estate for IHT purposes. If however the LISA is owned by somebody with a surviving spouse/civil partner, that spouse/civil partner will also inherit the LISA tax advantages and will be able to invest as much into their own LISA as the value of the deceased spouses’ on top of their usual allowance.
Finally, it is important to note however, that any contributions to a LISA will count towards the overall £20,000 ISA contribution limit from next April.
COMMENT:
It will be interesting to see how many people will actually take advantage of the LISA as an alternative to effecting a registered pension plan for retirement planning. Of course if the desire is to get onto the property ladder for the first time, the LISA will be a more popular choice.
For ‘ordinary retirement savers’ while they will be able to make partial withdrawals, if those withdrawals occur before age 60 they come with a sting in tail as the government bonus will be lost – including any interest or growth on that bonus and a 5% charge will apply.
How attractive a LISA will be will therefore depend on the circumstances and requirements of the investor.
It will clearly be attractive for the would-be first time buyer who is 40 or under.
It will also be attractive for the person under 40 who wishes to save until age 60 – but in the knowledge that if all else fails they can get the money back before then at any age – albeit suffering the penalty of the loss of the government bonus, growth thereon and a 5% charge.
For the ‘retirement saver’ who is under age 40 and a higher rate tax payer, a pension plan will still appeal – at least under the current rules. This is effectively the case as access at age 55 is now available without the requirement to purchase an annuity but, of course, 75% of the fund will be taxable – which is not the case with the LISA at age 60.
If you require further information about the LISA please do not hesitate to contact Warren at Lexington on 01793 771093.
