WARR & CO ACCOUNTANCY BLOG
Last week the Government launched the new Lifetime Isa, offering a maximum £1,000 cash for FREE every year – yep, you read that right! So what do you have to do to get in on all of this free cash flying around, and is it right for you? Read on to learn more…
OK, so sadly the Lifetime Isa isn’t for everyone, you’ll have to be able to answer YES to all of these questions…
- Are between 18 and 40 years old?
- Are you a UK resident and planning to remain in the UK?
- Are you saving for your retirement or first home?
- If you’re planning to buy your first home, will it cost less than £450,000?
- Have a spare £100 or £25 per month right now?
If you’ve answered yes, or have someone in mind who could answer yes, to all of these, read on…
What is the Lifetime Isa?
The Lifetime Isa has been introduced to encourage the <40 crowd to save for their retirement. Generally those under 40 don’t think too much about pensions and savings for later years, at least not as much as they think about the difficult task of saving to get on the property ladder. So the government has bundled these together in the hope that this Isa will encourage people to continue saving for later in life once they’ve bought that illusive first property.
You can read more about it on HMRC’s website here.
What are the rules of the Lifetime Isa?
Well firstly you have to meet the criteria above. You’ll need £100 to open your Isa with or to be able to commit to saving £25 per month.
You also have to be willing to contribute up to £4,000 per year to get the most out of it. And if you take money out for any reason other that the purchase of your first home or for retirement, you’ll face penalties – making it less flexible than a standard Isa. Your Lifetime Isa is a bit of a misnomer, you can continue to and benefit from the Government contributions in this Isa only until your 50th birthday. There’s a maximum 32 years to profit from with this Isa.
However, the government contributions are not insignificant. You can add money to your Isa as and when you can, lump sum or small monthly contributions. And for every contribution you add in, the Government will add a state bonus of 25%.
So if you add in the maximum £4,000 each year, you’ll get £1,000 for free!
What’s more, the money in your Lifetime Isa acts as savings, which you can accrue interest too.
You will receive your first Government bonus after 12 months in the scheme, then after that, the 25% bonuses will be added monthly. So you’ll need this Isa open for 12 months or longer to benefit before you buy a house.
If you decide to take money out before you’re 60th birthday, and not for the purpose of buying a house, you’ll face a 25% withdrawal charge. This will mean you’re getting less back than you put in – so watch out for that one! The 25% is calculated on total money in the Isa, your contributions + the Government contributions. So while the Government will be putting an extra 25% in for you, you’re technically losing more than 25% of you original contributions.
You put in £4,000. Government contributes £1,000. You have £5,000.
If you then choose to withdraw £4,000 you will be charged £1,250. You now have -£250.
The only caveat to this penalty withdrawal rule is in the case of terminal illness or death, in these circumstances the money can be accessed without penalty.
Is the Lifetime Isa better than the Help To Buy Isa for first-time buyers?
The great news is that the Lifetime Isa is associated to an individual, so if a couple is buying a house together, and neither have bought a property before, they can both use their Lifetime Isa savings towards the purchase.
And with a maximum bonus of £32,000 compared to the Help To Buy Isa’s £3,000, it’s clear to see that this Isa will be more popular with the young crowd if they can manage to feed this Isa on a regular basis.
With housing prices rising, it’s a comfort to know that the house price cut off is £450,000 for the Lifetime Isa, compared to £250,000 (£450,00 in London) for the Help To Buy Isa. Meaning that Lifetime Isa subscribers have significantly greater options for their first home.
Plus Help To Buy isn’t likely to be around much longer for new investors, with it’s availability end date firmly set for 2019.
How does the Lifetime Isa work for retirement?
After you reach your 60th birthday, all the money held in your Isa can be withdrawn penalty-free and tax-free.
However, the Lifetime Isa is unlikely to be more beneficial than contributing to your company pension scheme. In fact, it’s been reported that young savers could be over £400,000 worse off contributing to the Lifetime Isa over their company pensions by the time the reach retirement.
So if you’re interested in a Lifetime Isa, it’s likely to be more beneficial for first time home buying. But there’s nothing to stop you from using it to buy your first home and then keeping whatever’s left in there to gain interest until your 60th. Every individual will have a different set of circumstances, so it’s best to consider all of your options at the time before squirrelling your money away.
Can I transfer savings in a different Isa into a Lifetime Isa?
Yes you can. Many may wish to transfer their Help To Buy savings into a Lifetime Isa. If this is what you wish to do, you’ll benefit from doing it in a timely manner. Transfer your Help To Buy into a Lifetime Isa before 6th April 2018 and you’ll receive the bonus from your Help To Buy as well as the 25% Lifetime Isa bonus for the Lifetime Isa.
Where can I get a Lifetime Isa?
Now here’s the tricky part. No banks or Building Societies are currently offering this Lifetime Isa. In fact, there are only three providers currently supporting the Lifetime Isa and they only offer a stocks and shares Lifetime Isa:
- Hargreaves Lansdown – a fund shop
- The Share Centre – a fund shop
- Nutmeg – an on-line advisory service
If you’re looking for a cash-based Lifetime Isa, you’ll need to wait a little longer. We expect more options to pop up throughout the next 12 months, but some banks and building societies have reported they have no plans to offer this Isa in 2017.
Should I get a Lifetime Isa?
The answer to this will depend entirely on your personal circumstances. As we mentioned, it’s likely to be helpful if you’re in the market for your first house within the next 1 to 10 years. Other than that you’re probably best investing in a pension scheme or taking a little more risk with other investment methods to prepare for your retirement.