The new tax year begins on the 6th April. That means you will have a new ISA allowance which you can use to open a brand new Lifetime ISA (LISA). The LISA is kind of like the Help To Buy ISA, but on steroids. Here’s all you need to know.
A NOTE OF CAUTION: LISAs are complicated, especially when it comes to tax issues surrounding retirement planning. Please seek proper financial advice when making retirement plans.
You can save up to £4,000 a year in a LISA, which the government will increase by 25% when the money is used to buy a house (for first time buyers only) or saved for retirement. So, if you save £4,000/year, the government will top that up to £5,000/year. Some important information:
- You must be aged between 18 and 40 to open a LISA.
- You can contribute monthly, or in lump sums, annually until you reach 50yrs.
- The 25% increase is paid annually in the first year, and monthly after the first 12 months.
- Currently, the maximum bonus is £32,000 (achieved by opening a LISA on your 18th birthday and adding £4,000/year until you’re 50.
- If buying a house, the money is paid directly to the conveyancer/solicitor, not to you.
- Couples can both open a LISA and use it towards a house together.
- If the LISA has been used to buy a house, the account remains open and you can continue to save for retirement. It’s unclear currently whether you will continue to receive the bonus. The expectation is yes, you will continue to receive the 25% bonus on savings towards retirement, even if you’ve withdrawn a chunk of money for a house deposit.
How Do I Spend?
The LISA is designed for two things:
- Towards the cost of a house worth up to £450,000 for first time buyers. However, the LISA needs to have been open for at least a year to achieve any benefit.
- Withdraw the cash after age 60 for use in retirement.
If your circumstances change, or you simply change your mind, you can withdraw your cash at any time, but will have to pay back all bonus payments received in the form of a 25% withdrawal tax. Here’s a few gotchas:
- If you inherit a property, you are technically no longer a ‘first time buyer’ and will not be able to use the LISA to buy a property. You can either keep the bonus and save for retirement, or withdraw the cash and give back the bonus.
- If you buy a house worth more than £450,000, you’ll have to give back the bonus through the 25% withdrawal tax.
- If you decide not to buy with a mortgage, the government reckon you don’t really need their money, so will apply the withdrawal tax.
Interest is paid tax free on ISA accounts. However, interest payments will not count as contributions and will therefore not attract the 25% bonus.
If you intend to use the LISA to save for your retirement, there are some key considerations when comparing with a pension.
- Firstly, pensions attract workplace contributions from your employer, which LISAs do not. These employer contributions are likely to be more valuable than the annual LISA bonus.
- Tax is paid on cash contributed to a LISA, but withdrawing the cash is tax free. This is the opposite to a pension.
- LISA is a savings account, so it will affect your eligibility for benefits, as well as acting as an asset in any divorce or bankruptcy case.
Got A Help To Buy ISA?
You can transfer your Help to Buy ISA to a LISA whist keeping the bonus. Timing is critical to make sure you get the full benefit. If this is you, head over to MoneySavingExpert’s ISA page where they’ve got a great deal of information on how to time your ISA transfer to perfection.
LISAs are complicated things. We suggest you do a good amount of reading and seek financial advice before committing large sums of money anywhere. The BBC have a good guide here. For more information, talk to your bank or building society.