Warning this is a technical article
Earlier this year the government announced that it would be introducing Lifetime ISAs from April 2017 to help address the dilemma facing young adults of getting on the housing ladder and the need to save for retirement.
The key features of Lifetime ISAs are:
- Available from banks, building societies and investment managers.
- To be eligible you must be a UK resident, Crown employee or a spouse/civil partner of a Crown employee, and aged between 18 and 40.
- Up to £4,000 can be saved per tax year up until age 50.
- Contributions will receive a government bonus of 25% of the amount subscribed – capped at £1,000 a year.
- The government bonus will be paid annually for the first tax year and then monthly from April 2018.
- You can only contribute to one Lifetime ISA per tax year.
- Contributions to a cash ISA, stocks & shares ISA, Innovative Finance ISA and Lifetime ISA are permitted so long as the cumulative total does not exceed the overall ISA limit each tax year.
- Same investment options as other ISAs i.e. cash, stocks & shares etc.
- The Lifetime ISA fund can be withdrawn at any time tax-free, provided the account has been held for 12 months after making the first contribution, and used to purchase a first home in the UK worth up to £450,000 that the account holder will live in. Buy-to-let properties do not qualify.
- Withdrawals must be paid from the ISA manager direct to the conveyancer. Unlike help-to-buy ISAs it is possible to withdraw all the Lifetime ISA funds (including the deposit and any government bonus) when contracts are exchanged and not on completion of the transaction.
- If the property purchase falls through or does not proceed within three months of a withdrawal being made, the full amount withdrawn must be returned to the Lifetime ISA manager by the conveyancer.
- From age 60 you can withdraw the money fully or partially for any purpose tax-free.
- Withdrawals before age 60, unless you are buying a first time property to live in or are terminally ill, will attract a 25% penalty of the amount withdrawn.
- Lifetime ISAs will have the same inheritance tax treatment as other ISAs.
I quite like them. It isn't a popular view within financial services but on the face of it more options is surely a good thing. One of my frustrations with pensions has always been the lack of access to capital particularly for when you have such a big financial commitment like a property purchase.
I am not sure they should replace pensions but could be another option as part of a regular savings strategy. For business owners, I like the idea of employer contributions (which are tax deductible) first, maybe ISAs second and if you still have the money Lifetime ISAs may make sense, particularly if you don't own a home yet. The details are still emerging and no doubt the game will be changed but I think this is a step in the right direction.