The under-40s got a bonus from the Chancellor in 2016’s Budget (like youth and beauty weren’t enough), with the launch of a new ‘Lifetime ISA’. This can sit alongside the normal ISA up to an overall ISA limit of £20,000 in the 2017/18 tax year. You can also put £4,080 in a Junior ISA for the kids.
That said, while the normal ISA is beautifully simple and that’s why most people like it, the ‘Lifetime ISA’ comes with a few more complexities. In some ways, it is even better than a normal ISA. Not only does it have all the usual good stuff – all income and capital gains from investments held within the ISA are largely tax-free – investors get a bonus on the way in. If you open an account before the age of 40, the government will top up your contributions by 25% until you are 50. So if you put in the maximum £4,000 every year, the Government will give you another £1,000 per year. Good eh?
But (there’s always a but) you have to use the money for either a first home (up to £450,000) or for retirement at aged 60 or over. Normal ISAs don't have these restrictions. Unlike a pension, you can take the money out of a LISA, but you’ll lose the government’s contribution and any growth in that contribution, plus you’ll pay a 5% surcharge.
Tom McPhail, head of retirement policy, says that the ‘LISA’ will have three main uses. Firstly, for those saving for retirement who won’t get the benefit of an employer pension contribution and who may possibly want to get early access to the money.
He says: “Every £800 paid in to the LISA will deliver £1,000 (plus investment growth) in their hands after 60. By comparison, a conventional ISA would return £800 and after tax, a pension would deliver £850 (for someone paying basic rate tax in retirement).”
He thinks this scheme is likely to be more popular with the self-employed than traditional pensions.
The second group is those who haven’t yet bought their first house and who are likely to want to use their savings to do so.
And the third are those who have already secured their maximum employer pension contribution through a workplace scheme, who want to save more on top and who will be paying the same rate of tax in retirement as when they are working.
Lifetime ISA versus Help to Buy
Yes, the LISA and Help-to-Buy ISAs look pretty similar. One is aimed at first time buyers and the other at, erm, people wanting to buy their first house.
There are subtle differences, however. First, the maximum amounts are different. Help-to-Buy is capped at £200 a month and the maximum government contribution is £3,000. Also, Help-to-Buy can only be held in cash, while Lifetime ISAs are more flexible, allowing a whole range of investments. So the Lifetime ISA will suit people who can save greater amounts, have longer time frames, and want access to the stock market for their savings.
Help-to-Buy ISAs can only be used towards a property worth up to £250,000, or £450,000 in London, while the Lifetime ISA can be used for property all over the country (subject to the same £450,000 limit).