From April 2017, the new ‘Lifetime ISA’ will sit alongside the normal ISA as an option for the under-40s. So if you’re a bit long in the tooth and can remember Wham!, forget it.
It has the usual ISA traits – largely tax-free income and gains – with an added bonus – the Government tops up the contributions by 25% up to the age of 50. However, before you get too excited it comes with more strings attached.
How much can you put in every year?
Investors can put up to £4,000 into a Lifetime ISA every year. Those that put in the maximum every year will receive an extra £1,000 from the government.
What are the benefits?
The Lifetime ISA combines all the lovely benefits of an ISA with some of the attractive features of a pension – a little bonus from the government. Unlike the Help-To-Buy ISA it can be invested in stocks and shares as well as cash.
But, and it’s a big but, there are restrictions on the way this money can be used. Why is life full of small print!?
The money must be used for a first home, up to the value of £450,000 in London and £250,000 outside London (NB the money will be paid directly to the conveyancer/solicitor, so there’s really no getting round this), or for retirement at age 60 and over. Investors can withdraw money before 60 but there are penalties (not for a house purchase) – the government will claw back its contribution and any growth in that contribution. There will also be a 5% surcharge on the amount withdrawn.
Who might it suit?
The Lifetime ISA will have a place in a savings portfolio for many under-40s, alongside conventional ISAs and pensions. It may particularly appeal to those who do not have pension provision through an employer, such as the self-employed, or those who are wanting to save for a deposit on their first home.
Here’s the catch. Although the 25% bonus is nice, just don’t forget that if you pay into a pension at work, your employer may well match your contributions. Ask your HR department how much they add for you now – and by 2019 when the law will force them to be more generous. If they are paying in £100 for every £100 you are (for example), this kinda beats any 25% Government bonus. BUT you can’t get your claws on pension money ’till you are at least 55. At least the Lifetime ISAs have the get out clause – even if the Government does take back its bonus.
So do think about what you’re saving for, when you need the money and which ‘deal’ is better for you.
Where can you get one?
Nowhere yet, but watch this space. Launch date April 2017. Expect Lifetime ISAs to be launched by the major online investment sites. The banks may launch cash versions.
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