A new LISA life for saving?

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In the run-up to the March Budget of 2016, there was much rumour and debate about possible changes to the pension tax relief rules. Ultimately, no changes to pensions tax relief were made in the Budget, but the government announced that it would introduce a new long-term savings option for those under 40, called a Lifetime ISA, from 6 April 2017.

Legislation relating to Lifetime ISAs, or LISAs as they are sometimes referred to, won’t be published by the government until later in 2016, following a period of consultation with industry groups. This article, therefore, summarises the details provided by the government to date. 

From 6 April 2017, the government will introduce a brand new savings option for those who are under age 40. Branded as the Lifetime ISA, this will give those eligible the opportunity to save flexibly over the long term for a home and/or for retirement in one account. The Lifetime ISA is also intended as a flexible alternative to pensions for the self-employed. 

The main points are:

  • a Lifetime ISA can be opened from 6 April 2017 by anyone between the ages of 18 and 40.
  • contributions of up to £4,000 per tax year made before a person’s 50th birthday will attract a 25% government bonus. This means that if a person makes a contribution of £4,000 in a tax year, they will receive a government bonus of £1,000 at the end of the tax year. Similarly, a contribution of £1,000 in tax year will result in a £250 bonus. The ISA manager will claim the bonus and add it into the Lifetime ISA account. The ISA fund will also benefit from any interest or growth from the chosen investment option(s).
  • any savings into a Lifetime ISA will be counted as part of the overall ISA limit (which will be increased from £15,240 to £20,000 from 6 April 2017). 

The government want to make it as easy as possible to contribute additional amounts on top of the amounts eligible for a bonus. So, it has said it will investigate ways for savers to contribute more than £4,000 per year before age 50 or to keep contributing after age 50 if they want to even though any such contributions won’t attract a bonus.

Lifetime ISA savings can be used to fund the purchase of a first home. Relevant details are:

  • Lifetime ISA savings, including any investment growth and government bonus, can be used towards a deposit on a first home (not a buy-to-let) worth up to £450,000 in the UK. This can be done at any time after 12 months of opening an account with the money being paid direct to the person or company dealing with the house purchase.
  • it will be possible for an individual to buy a first home with someone else and for them to each benefit from the government bonus from their own Lifetime ISA if they are both eligible. 

There will be rules setting out how ‘Help to Buy’ ISAs and Lifetime ISAs will interact in terms of the government bonus and transfers into a Lifetime ISA account. 

After a person reaches age 60, any full or partial withdrawals from their Lifetime ISA will be tax-free. Any withdrawal, including the government bonus, made can be used for any purpose – they won’t be restricted to just providing retirement benefits. While Lifetime ISA savings remain invested, any interest or investment growth will be tax-free. 

If savings are withdrawn before age 60 (other than to help buy a first home or in circumstances of terminal ill health), the government bonus will be lost as will any interest or growth received on this. There will also be a 5% early withdrawal charge.

Savings can be withdrawn in full before age 60, without the loss of the government bonus, if a person is diagnosed with terminal ill-health (based on the pensions definition). The government has also said it will consider whether Lifetime ISA savings, plus the government bonus, can be withdrawn in full for other specific life events in addition to buying a first home. It will also look at whether there should be flexibility to borrow funds without incurring a charge if the borrowed funds are fully repaid (they quote this as being possible in the USA with some 401K retirement plans). 

Further information on Lifetime ISA’s can be found in the following two government documents:

Lifetime ISA factsheet

Lifetime ISA technical document

This article is based on our current understanding of the government’s March 2016 Budget announcements. The final rules for Lifetime ISAs will be set out in legislation, which is expected to be published in autumn 2016.     

Pensions Technical Services