The Government launched a new type of ISA called the Lifetime ISA (LISA) on 6th April 2017. This article explains how the Lifetime ISA works, who can use it, and how it is different to the main ISA. The Lifetime ISA is particularly attractive if you are aged under 40 and are saving towards your first home.
- How the Lifetime ISA works
- Who can open a Lifetime ISA?
- Withdrawals from a Lifetime ISA
- Lifetime ISA withdrawal penalties
How the Lifetime ISA works
The Lifetime ISA (LISA) works alongside the existing ISA, and provides much of the tax-free savings elements of existing ISAs.
You can save up to £4,000 into a Lifetime ISA, per person, per tax year, although this forms part of your overall ISA allowance, which is £20,000 for the current tax year. Therefore, if you save the maximum £4,000 into a Lifetime ISA, you can only save a further £16,000 into a standard ISA. Married couples can double these allowances.
The main benefit to a Lifetime ISA is that the Government will add a bonus, with 25% added to your savings. So if you save £4,000, you will get an additional £1,000 added on top. This bonus does not form part of your overall ISA allowance, so £20,000 in total ISA savings could add up to £21,000.
Importantly, you can transfer assets from other ISAs, and still qualify for the bonus. So, if you meet the criteria, and you have existing ISA savings, you could transfer from your existing ISA to your Lifetime ISA, and get an immediate boost to your tax-free savings. However, do bear in mind the withdrawal penalties set out below.
Who can open a Lifetime ISA?
With that generous bonus, comes some important restrictions. The Lifetime ISA is designed for younger savers, who are UK residents between 18 and 39. Therefore, you should consider opening a Lifetime ISA if you are under 40, even if you just place the minimum investment into the plan. Otherwise, you may lose the ability to get those bonuses in the future. If you open an account before your 40th birthday you can qualify for bonuses up to your 50th birthday.
Withdrawals from a Lifetime ISA
You will suffer a penalty unless you meet one of the following restrictions.
- Buying your first home
When you take withdrawals, you get to keep the bonus if this has been saved in your Lifetime ISA for at least 1 year, and is used to buy your first residential property up to a value of £450,000.
- After age 60
Alternatively, you can keep the bonus if you make withdrawals after age 60. Interestingly, the Lifetime ISA does look somewhat like a cross between a standard ISA and a pension plan from this perspective, so perhaps this could be seen as a precursor towards an alternative retirement plan.
- Terminal illness
If your GP will confirm in writing that you have less than 12 months to live, you can take withdrawals from your Lifetime ISA and keep the bonus.
Lifetime ISA withdrawal penalties
If you take a withdrawal from your Lifetime ISA that does not meet the criteria above, you will suffer a 25% penalty to your balance.
In practice, this would probably mean that you get back less than you pay in.
As an example, if you had paid in £10,000, you would get bonuses of £2,500, making a total account value of £12,500. If you later make an ineligible withdrawal you would suffer a 25% penalty to the whole account. 25% of £12,500 is £3,125. This would leave you with £9,375, a capital loss on your original investment of £625.
This may look different if your account grows in value, but this penalty is one reason why you should be careful not to invest in a Lifetime ISA unless you plan to make withdrawals that fit the criteria. Otherwise, you would probably be better off with a standard ISA. Despite this, a Lifetime ISA is certainly more flexible than a pension plan, given that there are no age restrictions on when you can access the money.
The Lifetime ISA as part of your financial plans
Using your tax-free allowances is an important part of saving towards your long-term goals. Take a look at our article on using your main ISA allowances, and how this can reduce your tax bills dramatically. This shows how valuable our Investment Management services can be. If you want to learn more, just contact us.
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About Dan Woodruff
Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.