Budget Follow-Up: The Lifetime ISA

In the Budget on 16 March the Chancellor announced a new type of ISA – the Lifetime ISA.  Here we explore the details of what the ‘LISA’ will offer and the planning opportunities it presents.

LISA in detail

The first point to note is that the Lifetime ISA will only be available to those under the age of 40.  The LISA is being introduced in April 2017, so you must be under 40 at that time in order to apply.

Each year it will be possible to contribute up to £4,000 and the government will provide a 25% bonus, for example topping a £4,000 contribution up to £5,000.  It will only be possible to pay into one LISA in a tax year, although you will be able to open LISAs with different providers in different tax years.  Any contributions to a LISA will count towards the overall annual ISA allowance (£15,240 for 2015/16, rising to £20,000 in 2016/17).

Contributions will continue to attract the government bonus until age 50.  After this point you can still make contributions but there will be no government bonus payable. 

Financial planning uses

The LISA has two built-in goals: the funds can be withdrawn either for the purchase of a residential property as a first time buyer, or in retirement (after age 60).  Funds can be withdrawn at other times but the government bonus will be lost and a 5% charge will be payable.

  • Buying a first home

The LISA is most obviously attractive for saving for a first home. 

The current Help to Buy ISA will remain available until 30 November 2019.  The two options are compared in the table below.

 

Lifetime ISA

Help to Buy ISA

Eligibility

Age 18-39 and UK resident

Aged 16+ and UK resident

Type of ISA

Investment/stocks and shares

Cash

Contribution limits

£4,000 a year until age 50

£1,000 on account opening then £200 a month, to a maximum lifetime limit of £12,000

Government bonus

25%

25%

Maximum Government bonus

£1,000 a year until age of 50

£3,000 total

Bonus paid

At the end of the tax year but can be paid in-year when a home purchase is made

When the saver purchases a home

Maximum property purchase value

£450,000 – restricted to UK residential property

£250,000 rising to £450,000 in London.

Transfers in from previous years' ISAs?

Yes

No

For the 2017/18 tax year only, a Help to Buy ISA (including the government bonus) can be transferred into a Lifetime ISA.

Full withdrawal conditions

Minimum holding period of 12 months before withdrawals to include the government bonus can be made for a home purchase or retirement.

Money can be withdrawn at any time but not replaced in the same month.  No fee for withdrawal but loss of bonus

Partial withdrawal conditions

Partial withdrawals allowed but government bonus is lost and a 5% charge will apply.

No withdrawal fee but loss of bonus

  • LISA vs. Pension?

For higher and additional rate tax payers, a contribution to a traditional pension offers more upfront tax relief.  However, in retirement only 25% of the fund can be taken tax-free (with the remainder subject to income tax).  In comparison, LISA funds will be paid out tax-free, so those who will still be higher or additional rate taxpayers in retirement might find that a LISA is more tax-efficient in the long run. 

To illustrate this, the table below assumes a £1,000 net contribution that is later withdrawn as a lump sum in retirement.  To keep it simple, it is assumed there is no growth on the investment.

Initial tax rate

Tax rate at age 60

Eventual proceeds from LISA

Eventual proceeds from pension

20%

0%

£1,250

£1,250

20%

20%

£1,250

£1,063

20%

40%

£1,250

£875

       

40%

20%

£1,250

£1,417

40%

40%

£1,250

£1,167

       

45%

20%

£1,250

£1,545

45%

40%

£1,250

£1,273

45%

45%

£1,250

£1,205

A traditional pension offers a potentially lower retirement age (minimum retirement age is currently age 55 but is rising to 57 in 2028 then tracking ten years below State Pension Age) but it is not possible to access the funds early.  A LISA can be accessed before age 60 should the need outweigh the penalties that would apply.

For those who have used up their pension Annual Allowance, the LISA could provide an extra opportunity for tax-efficient retirement saving.

 

 

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