WHAT IS THE NEW LIFETIME ISA? SAVE FOR A FIRST HOME AND A PENSION.
With rising property prices, first time buyers are finding it increasingly difficult to save for a deposit without asking parents for help. The new Lifetime Isa has been launched by Government as a way to get a foot on the property ladder and save for a pension at the same time. So how does it work and what is the catch?
Chancellor George Osborne announced plans for the new Lifetime Individual Savings Account (ISA) in the budget, offering individuals between 18 and 40 a £1 top-up for every £4 saved.
The cash and bonus of up to £1,000 a year can be withdrawn tax-free to buy a first home or to use as a pension.
Who can get one?
If you're between the age of 18 and 40 in April 2017, you can open a Lifetime ISA. The Treasury said the Lifetime ISA would be limited to one per person, rather than one per household, allowing couples to each get the bonus and pool their savings together.
Those aged up to 40 who already own a home will be able to open a Lifetime Isa to save into a pension.
How does it work?
If savers open a Lifetime Isa between the age of 18 and 40, any money they save until the age of 50 will receive an added 25 per cent bonus from the government.
Save up to £4,000 each year and that’s a bonus of up to £1,000 per year. Savers can use some or all of the money to buy their first home worth up to £450,000, or keep it until they are 60. The bonus will be paid on some or all of the money taken out to buy a first home or after the age of 60.
There is no minimum contribution – you can save as little or as much as you want each month, up to £4,000 per year.
ISAs are likely to be available in the same way Help to Buy ISAs now with different banks and building societies offering competing products.
There are similarities with the Help to Buy Isa, which is also aimed at helping prospective purchasers to save for a deposit. But after buying a property, people can continue to save into the Lifetime Isa.
If you have a Help to Buy Isa, you can transfer those savings into Lifetime Isa in 2017, or continue saving into both – but you will only be able to use the bonus from one to buy a house. The Help to Buy Isa is being axed in November 2019.
When does it start?
Lifetime Isa accounts will be available from April 2017.
What are the pros and cons?
The advantages are:
It should help those trying to save for a deposit for a house as the 25 per cent top-up will help savings to grow faster.
For the self-employed, who don’t have a workplace pension with employer contributions, it is an incentive to save for retirement.
The disadvantages are
There are penalties for making withdrawals before the age of 60 for anything other than to buy a new home. You can withdraw the money earlier but you will have to pay a five per cent charge and lose the government bonus plus any interest or growth on this.
You can’t earn any more bonuses from a Lifetime Isa after the age of 50.
There are controls over how you spend the cash. The bonus only applies if you use the savings to put down a deposit for a house, or withdraw it after your 60th birthday.
Saving for retirement through a Lifetime Isa could be less beneficial than an ordinary pension where you save from untaxed income – the Government pays tax relief at 20 per cent, 40 per cent and 45 per cent income tax. The Lifetime Isa bonus is the same as tax relief for basic rate taxpayers but less attractive to higher earner.
Overall, the scheme has been broadly welcomed by industry experts as an incentive to save.
If you are considering buying a home, you may find some of these services useful: