Lifetime ISAs

A Lifetime ISA can help you save tax-free for your first home or retirement with the boost of a 25% government bonus.

In his March 2016 Budget, George Osborne made savers sit up and pay attention with his unveiling of the Lifetime ISA.

The announcement came just a year after new tax-free savings allowances which had meant the ISA had been predicted by some to be on its last legs.

The Lifetime ISA targets the under 40s and is a two-pronged attempt to get people saving for their first home and for their retirement.

It's a new, fourth type of ISA that - within the limits of your annual allowance, which is £20,000 in the 2017-18 tax year - you can open as well as a Cash ISA, Stocks and Shares ISA and/or an Innovative Finance ISA.

Funds within the Lifetime ISA can be cash and/or stocks and shares; it's not yet clear whether they could also be peer-to-peer investments.

Who are Lifetime ISAs for?

It's known that Lifetime ISAs can only be opened if you’re between the ages of 18 and 40, and that you can then continue to pay into them until the age of 50.

Accounts will be limited to one per person - which means a first-time buyer couple could use an ISA apiece to buy a shared first home.

How does the Lifetime ISA work?

The government has said that the Lifetime ISA is to ensure young people don’t have to choose between saving for their retirement and for their first home.

With a Lifetime ISA, you’ll be able to save up to £4,000 each year and receive a 25% bonus from the government on what you put in – so in some respects it works in a similar fashion to the Help to Buy ISA announced in the 2015 Budget.

You can save more than the £4,000, but you’ll only earn your chosen ISA’s interest rate, without the bonus. Remember, though, that all the interest will be tax free.

The savings can then be accessed, either when you buy your first home, or at retirement.

The Lifetime ISA became available from 6 April, 2017. Contributions can be made, and the bonus paid, up to the age of 50.

Transfers into Lifetime ISAs

You’ll be able to transfer your Lifetime ISA between providers within 30 days, as you can with Cash ISAs, so it’s a good idea to compare rates regularly to make sure your savings earn a competitive rate of interest.

You’ll also be able to transfer existing ISA funds to a Lifetime ISA.

Claiming the Lifetime ISA bonus

To get the bonus, you need to withdraw your funds at one of two key points in your life.

Buying your first home

To get the bonus when you buy your first home, you'll need to withdraw the funds from your Lifetime ISA at this time.

However, this must be at least 12 months from when you opened your Lifetime ISA.

There's a limit of £450,000 on the price of property that can be purchased with a Lifetime ISA - which is a pretty generous budget for a starter home.

The limit applies nationally, so there’s no higher limit for Londoners.

Retirement

To use your Lifetime ISA in retirement, you'll need to wait until you’re at least 60 to withdraw the funds and get the bonus. The withdrawal can either be the whole amount or a partial amount.

Interest on the Lifetime ISA

As with any ISA, you’ll earn tax-free interest on the Lifetime ISA funds.

No Lifetime ISA products have yet been announced, so it remains to be seen whether rates will be competitive.

Note that your Lifetime ISA funds will form part of your overall, annual tax-free ISA limit.

Transferring savings from a Help to Buy ISA to a Lifetime ISA

In the March 2016 Budget, it was announced that Help to Buy ISAs would be available until 30 November, 2019, as planned.

Holders of Help to Buy ISAs can open an additional Lifetime ISA, but they’ll only be able to use the bonus on one of the accounts when they buy their first home.

During the 2017-18 tax year only, if you have a Help to Buy ISA you’ll be able to transfer savings held in it to a Lifetime ISA and still save an additional £4,000.

Any Help to Buy ISA funds that were saved before the introduction of the Lifetime ISA on 6 April, 2017, won't count towards the Lifetime ISA annual contribution limit.

Early withdrawals from Lifetime ISAs

The government says Lifetime ISAs are designed for the long term, but “understands that circumstances change”.

You can withdraw funnds early, but if you do you'll pay a 25% penalty on the amount withdrawn.

This actually amounts to losing the bonus, plus 6.25% of your own investment so withdrawals from a Lifetime ISA aren't to be taken lightly.

However, if you're terminally ill you'll be able to withdraw funds with the bonus and without penalty to spend on whatever you like.

If you die, money in the Lifetime ISA and the bonus will form part of your estate.

What’s more, there’s a serious disincentive for withdrawing funds early under other circumstances – the government is proposing that you’d lose the bonus and any interest associated with the bonus, and that a “small” 5% charge could be applied.

If you’d saved £4,000 each year for five years, that ‘small’ charge would amount to a £1,000 deduction.

Borrowing against a Lifetime ISA

It’s not all bad news – the government is discussing whether savers should be able to ‘borrow’ funds against their Lifetime ISA instead of withdrawing, with no charge if the funds are fully repaid.

Inheritance issues

The Lifetime ISA will be subject to the same inheritance tax treatment as other ISAs meaning that, on the death of the account holder, the funds will form part of the estate for inheritance tax purposes.

A spouse or civil partner can inherit ISA tax advantages and will be able to invest as much into their own ISA as their spouse used to have, on top of their usual allowance.

By Derri Dunn