LISA is potentially a valuable savings option. But how does it work and who is it aimed at?
From April 2017 a new savings product called LISA (Lifetime ISA) is available. It is designed to help young people save flexibly for the long-term throughout their lives. However, as with most financial ideas, the devil is in the detail.
The main benefits of the LISA are:
- it is designed to work with existing ISA products and will be simple for savers to use
- as with existing ISAs investment growth on savings and future withdrawals are tax-free
- savers will be able to make LISA contributions (up to £4,000 in each tax year) and receive a bonus from the age of 18 up to the age of 50. Where the maximum is saved, this could mean a £1,000 bonus each year from the government
- there is a one-off 2017/18 bonus for those who also use the help to buy ISA – see below for more details.
Who is it aimed at?
To use the LISA the saver must be aged 18 or over but under 40.
How does the LISA differ from existing ISAs?
The Lifetime ISA is designed for two specific purposes:
- for first-time buyers to use towards a residential property situated in the UK. This can be done at any time, provided the Lifetime ISA has been held for 12 months or more. However, it needs to be emphasised that the tax-free funds, including the government bonus, can only be used to buy a first home worth up to £450,000 at any time
- to take out and use in retirement once the saver is aged 60. Once that age is reached the tax free funds can be used for ‘any other purpose’.
So the government is stressing the long term nature of the savings.
So far so good? Now for the complicated bit
As mentioned above, the devil is in the detail. Perhaps unsurprisingly the government has surrounded the LISA with rules and restrictions. These are important and need to be considered before an application is made:
- Any contributions to a Lifetime ISA will sit within the overall £20,000 ISA contribution limit. However the government bonus will only be paid on contributions of up to £4,000 per tax year.
- Individuals will be able to transfer savings from other ISAs as one way of funding their Lifetime ISA. In line with existing rules, transfers from previous years’ ISA contributions do not affect that year’s £20,000 overall ISA limit.
- Savers will be able to contribute to one Lifetime ISA in each tax year, as well as a cash ISA, a stocks and shares ISA, and an Innovative Finance ISA, within the new overall ISA limit of £20,000 from April 2017.
- Saving into a Lifetime ISA will be similar to saving into any other ISA. Qualifying investments in a Lifetime ISA will be the same as for a cash or stocks and shares ISA. Individuals will be able to transfer their Lifetime ISA within 30 days between providers to get the best deal, in line with the existing ISA rules.
Withdrawing money for a first time purchase – how does it work?
In addition to the details above, there are also some interesting points to note when the funds are withdrawn:
- If the saver is buying their first home with someone else they can each use a Lifetime ISA and each benefit from their government bonus.
- The detailed rules are based on those for the Help to Buy ISA. This includes that the withdrawal must be for a deposit on a property for the first time buyer to live in as their only residence and not buy-to-let.
- The saver has to inform their ISA manager of the house purchase, who will claim any additional bonus due from HMRC, and then the withdrawal will be paid direct to the conveyancer. If a purchase falls through after a withdrawal has been made then the funds will be returned to the same ISA manager by the conveyancer and will not count against the annual contribution limit.
Interaction with the existing help to buy ISA
The existing help to buy ISA will be open for new savers until 30 November 2019, and open to new contributions until 2029. However, they are not stand-alone and can be used alongside the LISA.
Savers will be able to save into both a Help to Buy ISA and a LISA, but will only be able to use the government bonus from one of their accounts to buy their first home. This gets complicated but is worth exploring. For example:
If an individual holds a Help to Buy ISA and a LISA they may:
- use their Help to Buy ISA with its government bonus to purchase their first home, and save their LISA with its government bonus for retirement
- use their LISA with its government bonus to purchase their first home, and withdraw the funds held in their Help to Buy ISA to put towards this purchase without the government bonus
- use their Help to Buy ISA, including its government bonus, to purchase their first home and withdraw funds from their LISA to put towards the purchase. In this instance the government bonus on the LISA savings would be returned to government and the individual would be required to pay a charge.
One off bonus for 2017/18
During the 2017-18 tax year only, those who already have a Help to Buy ISA will be able to transfer these funds into a LISA and receive the government bonus on those savings.
What is the overall impact of the LISA for savings?
The LISA is potentially a very valuable savings tool, mainly due to the government bonus. However, for a long-term saver the LISA would need to be compared to a normal pension to see which is best for them.
The comparison of the two products is a complex issue beyond the scope of this article and has different outcomes depending on things like self-employment, auto-enrolment etc.
Article from ACCA In Practice