Your guide to the Lifetime ISA
And so, with the dawn of the new tax year, one of George Osborne’s final legacies from his time as Chancellor of the Exchequer comes into existence: the Lifetime ISA (Lisa). It hasn’t been without its controversies in the build-up, and the fact that just three providers are offering the savings product – none of whom are a high-street bank – has underpinned the sense of anti-climax surrounding the launch.
There has also been a somewhat nasty surprise sprung on consumers that a 2 per cent annual fee will seemingly be the going rate for a Lisa. Perhaps the biggest issue of all though - particularly among younger savers, to whom it is arguably more targeted – is a lack of understanding about the Lisa, and the rules pertaining to it.
To help clarify any ambiguities or questions you may have, we’ve put together this guide to help you decide if the Lifetime ISA is the right savings product for you…
What is a Lisa?
The Lifetime ISA is a Government-backed ISA which aims to help both first-time buyers and/or retirement savers by virtue of a bonus scheme. Essentially for every £4 you contribute to your Lisa, the state will supplement your account with an additional £1 (i.e. a 25% bonus). The maximum you can put into a Lisa each year is £4,000, thus meaning the maximum annual bonus you can earn each year is £1,000.
The Lifetime ISA will be available as a cash or stocks & shares ISA.
Note: it is not currently available as an Innovative Finance ISA.
Who can open a Lisa?
Anyone between the ages of 18 to 40 can open a Lifetime ISA, although you are able to contribute to one until the age of 50. This means that, for those who are able to open a Lifetime ISA at the age of 18, you could theoretically subscribe a total of £128,000, which would be augmented by a bonus of £32,000. Bear in mind too that any interest or investment growth will not count towards your allowance, thus meaning your account could rise well beyond these limits. However, your Lisa will need to have been open for at least a year before you can be eligible for the bonus.
When can I access my funds?
You can withdraw funds from your Lifetime ISA penalty-free until 5 April 2018 (although you would then need to close the account), or anytime after you turn 60. However, if you wish to withdraw funds between then, you will incur an exit penalty of 25 per cent. So if, for example, you save £12,000, and accrue an additional bonus of £3,000, and then decide you need to withdraw this amount outside of the exceptional terms stated above, you will only get £11,250 back: equating to an effective loss of £3,750.
There are two exceptions to the above. If you are a first-time buyer looking to buy a property for under £450,000, you can access the funds in your Lisa without penalty. Please note that it will need to be the first home you have ever owned, and purchased with a mortgage. You also won’t be able to rent the property out.
Alternatively, if you are suffering from a terminal illness, you may also access the funds free of charge to fund treatment.
How does it compare with the Help to Buy ISA?
The Help to Buy ISA (H2B ISA) offers a similar 25 per cent Government-backed bonus scheme for first-time buyers, although there are important differences. First and foremost, the H2B ISA is exclusively geared towards first-time buyers, and the bonus cannot be retrieved for any other purpose. You are also considerably more limited in terms of what you can contribute: £1,200 for the first month, and £200 per month thereafter.
Also, the maximum total bonus you can gain through the H2B ISA over time is £3,000, while, outside of the M25, only properties valued at under £250,000 will validate the bonus (£450,000 in London – for the Lisa the limit is £450,000 everywhere in the UK). And the other comparative benefit of the Lisa is that you are free to use the bonus towards your property deposit (effective once contracts are exchanged), whereas an H2B ISA bonus only becomes available after completion of the sale.
Where can I open a Lifetime ISA?
As mentioned above, there are currently just three providers offering a Lisa: Nutmeg, Hargreaves Lansdown and the Share Centre, while Moneybox expect to deliver one soon too.
Yet these are all stocks & shares Lisas. The likes of Lloyds, Barclays, HSBC, Halifax and Santander have all confirmed that they currently have no plans to offer a cash version of the Lisa, and the only building society to have indicated they will provide this product is Skipton – although theirs will only be available in June.
Is the Lisa a good substitute for a pension?
This has been a bone of contention among pension champions, who believe the misinformation surrounding Lifetime ISAs could see consumers – particularly within younger age groups – unwittingly deprive themselves of the benefits pensions offer.
The appeal of a Lisa is very clear. It’s a simple product, and even if you are already a property owner, it can still be used as a retirement savings plan. After all, both subscriptions and withdrawals are tax-free, whereas with a pension, you are subject to tax upon withdrawals as per the reforms which came into effect in April 2015.
Yet for those who are neither self-employed nor a basic-rate taxpayer, pensions are likely to be more lucrative, given employer contributions – even in spite of the bonus offered by a Lisa. It thus depends on personal circumstances, but the idea that the Lisa will replace pensions appears a far-fetched one. Instead, it is a scheme which may be better used in parallel with a pension.
Anything else I need to know?
Not really. All we’d remind you of is the charges involved with setting up and maintaining a Lisa. It will also be interesting to observe the impact on the market once more providers come to the party. Setting up a Lifetime ISA won’t be for everybody, given the exit penalties involved. But it is another string to the bow for those looking to save towards retirement, and, in a challenging savings climate, it would seem that it is likely to do more good than harm.