Lifetime ISA

What Is A Lifetime ISA?

Launching in April 2017, the new Lifetime ISA will be an absolute must have for first-time buyers as the state will add a 25% bonus to anything you have saved away – this could earn you up to £32,000 of free money! For retirement savings it will work in the same way, although this doesn’t necessarily mean it is better and I’ll talk you through why.

***Please use this as a general guide, this a new way to save and  not all the information out there is complete yet and is still subject to consultation. I will endeavor to update accordingly as news comes in***

You can save a maximum of £4,000 a year, and the 25% bonus is added at the end of the tax year

You’re able to save up to £4,000 a year into the Lifetime ISA either in one lump sum or smaller deposits throughout the year. At the end of each tax year the state will add a further 25% to your pot. So if you save the full amount of £4,000, you will earn £1,000 bonus giving you £5,000. If you only managed to save £1,000, the bonus payment would be £250 giving you £1,250 in total for that tax year.

  • The bonus is paid until you reach age 50.
  • The bonus will be paid at the end of each tax year annually.
  • The bonus is only paid out on contributions you have made. If you have a cash LISA the bonus would not be paid on any interest you earn, and for shares LISA if the investment grows or shrinks it has no bearing on the bonus payments.
  • The maximum bonus you can be paid out is £32,000 (unless there any rule changes by future governments); to earn the full amount you need to open one on your 18th birthday and contribute the maximum of £4,000 per year until you were 50.  

bankLifetime ISA will be launched on 6 April 2017, you must be 18 or over but under age 40

Unfortunately if you’re 40 on or before the 6 April 2017 you are not eligible to apply for a Lifetime ISA, the earliest you could’ve been born is 1977. If you are close to that deadline I would advise you to apply as quickly as possible so you don’t miss out. Once opened you will be able to save into it until you’re aged 50 – meaning if you had hit the maximum allowance of £4,000 a year, you’d still have a pot with £50,000 in it.

You can use the money towards your first home worth £450,000 or less or your retirement when you reach age 60

It has been designed for two purposes. The first one is to encourage first-time to save and use towards a residential property, which can be done at any time, providing the LISA has been open for a minimum of 12 months. The second is for people to save towards their retirement once you have reached at least age 60. There is no tax to pay when you take the money out for either.

First-time buyers can’t afford to miss out

Like the Help to Buy ISA, the Lifetime ISA is something that first-time buyers cannot afford to miss out on. Nothing any bank can offer comes close to the 25% the state will add on in bonus payments – it’s money for nothing and should not be sniffed at!

Even if you have no immediate plans to buy a house, it is still starting one and contributing what you can. If you don’t eventually go on to use it for a new home you will still have made an early start on your retirement fund.

It’s an individual product and couples can have one each

Again, just like the Help to Buy ISA, there is no such thing as a joint LISA. Both you and your spouse/partner can have one each. If you’re using the money to buy a home together the rules are clear:

  • If you’re both first-time buyers and are buying a house under £450,000, you can both open one each and save into it, effectively doubling the bonus when you come to withdraw the money to put down on your property.
  • If you’re a first-time buyer purchasing a property with somebody who has owned a property before – you can still open one and use it towards a home purchase together, they can open one but they can only use it for retirement.

You can have a Lifetime ISA and a Help to Buy ISA

The Help to Buy ISA launched back in December 2015, you can earn a 25% bonus payment from the state, as you can with the LISA, if you use the money to buy your first home.

  • You can have a Help to Buy ISA and a Lifetime ISA.
  • You can only use the bonus from one of them to use for your first home.
  • If you use the bonus payment from your Lifetime ISA you are unable to claim it from your Help to Buying ISA, but you can still keep the money and the interest it has earned and use it towards your new home.
  • If you use the bonus payment from your Help to Buy ISA for you new home, you would have to pay a penalty to use the savings from your Lifetime ISA towards your first home. However, you can still use it to get the bonus payment for retirement savings.
  • You can save using a Help to Buy ISA now and transfer the savings to a Lifetime ISA from 6 April 2017

Lifetime ISAYou can put the money into savings or stocks and shares

One of the major differences between a LISA and the Help to Buy ISA is you have two saving options, a cash LISA, and an investment LISA.

Cash LISA

Basically the equivalent of a savings account. Your money is safe and you have set amount of interest on top.

Investment LISA

With this account your money is invested in stocks and shares or shares and funds and the performance of it depends on the stock market. The money you put in is at risk as with all investments, but if they perform well you could make significantly more.

If you’re investing you should look to invest for a minimum of five years. This gives you more time to ride out any dips in the market that could potentially end up losing you money.

If you’re a first time buyer looking to purchase your home in in under 5 years, your best option would be the cash LISA. The interest is guaranteed and you’ll have an idea of how much you’re likely to save. If you already own your own home and retirement is still five to ten years away, it maybe wise to take a risk and invest your money. You can really reap the rewards of investing in the stock market – obviously with this option it  comes with the added risk of losing your money attached, if the stock market or the companies you have money invested in go bump in the night.

Your savings interest or investment growth is completely tax-free

Individual saving accounts (ISAs) is a place you can put your money and stop the taxman from getting his hands on it. By April 2017 the allowance for ISA savings is being increased from £15,240 to £20,000, any money you put into a LISA will count towards that. If you met the full allowance of £4,000 for the year in your LISA, you would only be able to put in another £16,000 in other ISAs. Any state bonus you receive does not count towards your yearly allowance.

Cash LISAs

You will receive interest tax free on anything you save into your account and any state bonus that you have already received when the interest is paid. You can keep all of this interest and you will earn interest on that too the following year – this is known as compound interest. The interest won’t count to your yearly allowance.

Investment LISAs

There are three main types of investment gains, this is how the investment LISA prevents you from paying tax:

  • Bond interest – you will not pay any tax on the interest you earn on your bonds.
  • Capital gains – if your investments are in an ISA, you are not liable for capital gains tax.
  • Dividends – you do not pay tax in an ISA

You’re not locked in

When you open a LISA you are not bound to stay with the same provider that you chose at the start.

Interest rates on ISAs can fluctuate so you should keep an eye on it and be prepared to chase better rates with different providers if yours drops and you see a more lucrative deal.

You may also decide to change your investment LISA provider should your investment priorities change, in which instance you would be able to move to another provider.

It’s perfectly fine to hold more than one LISA at any one time, but you may only pay into one in each tax year. You can transfer the current year’s money around, providing your transfer the whole lot at the same time.

 

So there you have it, another great ISA on the horizon to encourage us to save for our futures. Will you be opening a Lifetime ISA?

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