Have you heard about the new Lifetime ISA? Launched this month, it provides a new means for you to squirrel money away for one of two purposes: to save for a deposit on your first property or to use as you wish once you reach 60.
The LISA encourages people to save by offering a 25% government bonus on investments each tax year. So if you save the maximum annual amount of £4,000 the government will add £1,000 to take the total up to £5,000. Not an insignificant sum. Both Cash LISAs and Stocks & Shares LISAs will be available; you will also benefit from either interest on your cash or growth on your shares. Don’t forget that stocks can go down too, losing you money. If you don’t want the risk, opt for a Cash LISA; the first one will be available from June 2017.
You can only open a LISA if you are aged between 18 and 40 years of age. Once open, you will be able to pay in up to £4,000 per year until your 50th birthday. Under the current rules, assuming that you open a Cash LISA on your 18th birthday and pay in the maximum amount every year until you reach 50, you will have saved £128,000 before interest and gained an additional £32,000 paid in by the government to reach a total savings pot of £160,000.
The government bonus is paid in annually until April 2018 and monthly after that date. You will get interest on this too. The bonus is calculated on your own contributions, and not on interest or stocks and shares growth/loss.
The downside is that there is a 25% early withdrawal penalty that will apply to money taken out before the saver reaches 60 years of age, unless the money is taken as a deposit on a property. At first glance this might seem to amount to losing the government’s money and not your own. However, the reality is that early withdrawal will cost you just over 6% of your own contribution.
For aspiring homeowners it is worth noting that money cannot be withdrawn from a LISA to use as a deposit on a property within the first year of opening the account. Its use is also restricted to residential properties costing less than £450,000 and you must be a first time buyer – this means that you will have never owned even a share in a property either in this country or overseas. You are permitted to hold a Help to Buy ISA as well as a LISA but you should keep in mind that you’ll only get the first-time buyers’ bonus on one of these accounts.
If you change your mind within the first year of opening your LISA you can close the account and withdraw your money without penalty, since you don’t receive the 25% bonus until the end of the first year. The rules also state that you won’t pay a withdrawal charge if you die or are terminally ill. Any LISA money, including bonuses and interest, will pass to your beneficiaries without penalty, although it will be part of your estate and therefore subject to inheritance tax.
There aren’t too many providers to choose from at the moment – and right now only one company are advertising their cash LISA. However, if you are looking for an alternative place to save for either yourself or your children once they reach 18, it is worth doing some further research into the new Lifetime ISA.