ISAs have also undergone quite a revolution in recent years and there are now a large family of different ISA products to choose from. The latest innovation is the Lifetime ISA (or LISA) due to be launched in April 2017. These are designed to help savers both with buying a first home and for planning for their retirement.
LISAs allow savers to invest up to £4,000 each year and receive a “bonus” from the government of 25% of the amount saved. This means that if you save the full allowance the government adds £1,000 at the end of the tax year. The savings and the bonus can be invested in either cash deposits or in stocks and shares with the growth and interest also being free from tax.
LISAs can only be opened by savers between the ages of 18 and 40. However, you can continue making savings and receiving bonuses up to age 50.
If you have a Help to Buy ISA already then only one of them can be used to fund the purchase of your first home. You can’t use both a Help to Buy ISA and a LISA.
Long term incentives but penalties to consider
If you kept saving the maximum amount from age 18 until age 50 then you would receive 32 bonuses of £1,000 giving you an extra £32,000 in your plan. And a couple could each have one, doubling up on the bonuses. Quite an incentive.
But the LISA has some clauses that may come as a shock to some savers, so these must be considered.
Withdrawals from a LISA are only free of tax after age 60 or if you use the money to buy your first home. So if you have ever owned a home before then this might not be for you and the property is for you to live in, not to rent out. The maximum purchase price is £450,000 so in some areas, like London, this might not buy you much.
You can get your money out, but if it is not after age 60, or for a home purchase, then penalties apply. The bonuses are lost and there is a further deduction of 5% to recover growth and interest on the bonus. So if you saved the maximum for 10 years, excluding growth, then £50,000 would be invested in the plan. If encashed, you lose the £10,000 in bonuses plus £2,500 so you only get back £37,500, less than the £40,000 you put in yourself.
You might also need to consider state benefits if you qualify for these. As savings, the value of the LISA could mean that you lose some or all of the benefits you would otherwise be entitled to. LISAs will have the same inheritance tax treatment as other ISAs. Upon the death of the account holder, the account will form part of the estate for inheritance tax purposes.
LISA vs pension
Is a LISA better than a pension? Pension contributions receive tax relief at 20%, and may be even higher depending on your tax position. Your employer may contribute too so contributions to a pension might even be higher than the LISA for the same outlay from you. Anyone under 40 will be able to access their personal pension pot from 57 as the minimum age will rise to 57 from 2028, up from the current minimum age of 55. This age will be rising in future, but you can’t access the LISA without penalty until 60.
Always remember that any investments can fall as well as rise. The return from them may go down as well as up, is not guaranteed, and you may not get back the amount you invested.
The information on this site is provided for your general information and use and is not intended to be relied upon by you in making or not making any investment decisions. It is recommended that you seek independent financial advice before making any investment decisions.
When nearing retirement we face the challenge of ensuring our funds will last. Increasing numbers of...
In recent years final salary pension schemes have been phased out by employers because people are li...
We take a look at the finances of three fictional heroes from the UK and discuss how financial plann...
According to the ILC, financial advice could make you better off. Find out how financial planning co...