The new lifetime ISA has the potential to increase savings ability – but the average deposit in January stood at £28,393.
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How will the Lifetime Isa work?
While the details are somewhat vague at the present time, the fundamentals of the Lifetime ISA are that it will be available to anyone under the age of 40 and will act as a hybrid between a traditional pension and an ISA.
Opening a Lifetime ISA will, in most ways, be identical to opening a regular ISA under the existing rules. If the account is used for retirement the saver will be allowed to take the proceeds tax-free after their 60th birthday. Withdrawals may be made before this date, subject to a 5% charge and forfeiting the government bonus. The bonus is equivalent to 25% of how much is saved, so for every £4 saved the Government will give a bonus of £1.
‘Ordinary savers have also had a big gift in the raising of the ISA limit from £15,000 to £20,000.
So anyone that is able to save the maximum £4,000 by 5th April 2018 will get £1,000. It’s hard to go wrong by putting money in an Isa because you can always switch it to a pension later – in fact this approach is positively beneficial if you are now a basic-rate taxpayer but switch your Isa money to a pension when you start to pay the higher rate.
The accounts will be available from April 2017. Where the individual is purchasing a home having contributed in that same tax year, they will be able to receive their bonus in-year (i.e. they will not have to wait until the following tax year to receive the bonus). And balances from the current Help-to-Buy ISA can be transferred across.
You can also choose to open a Lifetime Isa alongside a Help to Buy Isa. However, you can only use the government bonus from one of these accounts to buy your first home.
Some or all of the savings you build up, along with the savings bonus, can be paid towards a deposit on your first home located in the United Kingdom worth up to £450,000.
However, you will only be able to use the bonus from one scheme to buy a house. “This will exclude many homes in London and the south-east, and unless it rises on a fairly reasonable basis, it will be of limited use to those buying in more expensive areas”.
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As Deloitte’s Nigel Barker explained: “Philosophically it does seem to be a Pensions ISA, with a nod towards first-time buyers”. Some borderline earners who will fall out of the higher-rate band may want to make additional pension payments now, as they will lose their higher-rate tax relief on contributions – every silver lining has a cloud! Once people reach the age of 60, they will be able to withdraw the money from their LISA tax-free, and use it to create a retirement income. This claim has pretty solid grounding: a recent study from the FCA found that as many as 50% of consumers did not fully understand pensions and the Pensions Policy Institute described the decision over when and how to withdraw pension funds as “among the most complex” financial decisions that any of us will make. This is changing to allow these dependants to keep money in the pension wrapper until they actually need it and helps people cascade pension wealth down through the generations in a tax-efficient way. Funds can remain invested and any interest and investment growth will be tax-free.
