The lowdown on Lifetime Isas
The latest addition to the individual savings account (Isa) family arrived at the start of the 2017/18 tax year. The Lifetime Isa (Lisa) is aimed at first-time buyers and young retirement savers, but has received mixed reviews so far. Here’s everything you need to know.
What is a Lisa?
The Lisa is designed to help first-time buyers and people starting to save for retirement. When you pay into a Lisa, the government will top up your deposits with an annual 25% bonus up to a yearly maximum of £1,000. So if you save £2,000 over a year, the government will add £500.
As with other Isas, you can choose a Cash Lisa or an investment Lisa and once your money is in a Lisa it can grow tax-free.
Who can save into one?
I’m afraid if you are over 40, a Lisa will be of little interest to you. You can only open one if you are between 18 and 40 years old. If you turned 40 on or before 6 April 2017, you are not eligible for a Lisa.
Once you have opened a Lisa, you can save into it and continue to get the government bonus until you are 50.
How much can I save?
The annual limit on Lisa deposits is £4,000. If you deposit the full amount, you would benefit from an annual £1,000 government bonus.
Pay in the full amount each year from the age of 18 to 50, and you would bank £32,000 from the government. That annual £4,000 limit is quite low, but you are allowed to open a normal Isa alongside a Lifetime Isa and pay the rest of your Isa allowance (£20,000 in the 2017/18 tax year) into that.
Also, you will be able to transfer money into your Lisa from other Isas up to the £4,000 annual limit.
What can I spend the money on?
Unlike other Isas where you are free to spend your savings as you like, there are big restrictions on what you can use your Lisa money for. You can use your Lisa savings to help purchase your first home, but the property must be valued at less than £450,000 and you must have had your Lisa for at least 12 months.
If you don’t use the money for a property purchase, you can’t access it until you are 60 – so it is intended to be used to help fund your retirement.
It is worth noting if you are buying your first home, you don’t have to withdraw your entire Lisa balance.
You can leave some money and continue to save for your retirement. Another benefit of Lisas is that there is no tax to pay when you access your money.
What happens if I need my money before I’m 60?
It is possible to withdraw money other than for a first-time house purchase from your Lisa before you turn 60, but you will pay a hefty 25% penalty on whatever you withdraw.
The aim is to recoup the bonus you have earned from the government plus a small charge.
The only exception to the rule is if you are given less than a year to live, then you can withdraw the cash without penalty.
Is it good for first-time buyers?
A Lisa is a brilliant savings vehicle for anyone hoping to get on to the property ladder, as you will benefit from free cash from the government to help you. Plus a Lisa is an individual product, so if you are buying as a couple you can each use a Lisa. That means you could save up to £8,000 a year and benefit from a £2,000 a year cash bonus.
Pension or Lisa?
Unless you are self-employed, a pension remains a better choice for retirement savings than a Lisa. “Workplace pensions have the advantage over the Lisa as there will be an employer contribution as well as the tax relief. Pound for pound, that’s better value for your retirement savings,” says Danny Cox, a chartered financial planner at Hargreaves Lansdown.
But there are a couple of reasons why you should consider using a Lisa as part of your retirement planning. Firstly, if you are selfemployed you aren’t getting the benefit of employer contributions to your pension, but a Lisa would provide you with a 25% top-up from the government, slightly higher than the tax relief that basic-rate taxpayers would get on a pension.
Secondly, with a Lisa you can withdraw the full amount at 60 without paying tax on it. “This would be particularly attractive if you think you might be paying more tax in or around your retirement or want to draw the money while you are still in some form of employment or receiving some income,” says Adrian Lowcock, investment director at Architas.
However, if you are a higher rate taxpayer, you will get 40% tax relief on a pension, so it should be your first choice for retirement savings.
If you have maxed out your annual pension contribution allowance – the maximum you can pay into your pension and receive tax relief on each year is £40,000 – then a Lisa is a good overflow retirement savings option.
This is because not only do you get the government top-up on your Lisa, but when you retire you should use that money first to fund your living costs as pensions are subject to far better tax treatment upon your death.
When you die, the contents of your Isas – including the government bonus – and savings accounts count as part of your estate and can be liable for inheritance tax (IHT). But IHT is not paid on assets held within a pension. So if you want to hand on some of your wealth after death, you spend your savings first and leave your pension alone.
Who is offering Lifetime Isas?
At the time of writing, very few providers are offering the product.
In the cash savings realm, five of the major banks we asked – Barclays, Lloyds, RBS, Santander and TSB – do not have a Lisa available at launch. They mostly stated that they are still looking into the regulations surrounding the product and don’t know at this stage if they’ll even launch a Lisa in the future.
Skipton Building Society says it’s the first – and only at the time of writing – savings provider on the high street to confirm it will offer a Lisa, and even that won’t be until June 2017. It says more details will be announced nearer the time.
When it comes to Stocks and Shares Lisas, just three of the seven major platforms Moneywise asked had a Lisa available from 6 April 2017 – Hargreaves Lansdown, Nutmeg and The Share Centre.
Consumers taking out Hargreaves Lansdown’s Lisa will have to pay a minimum lump sum investment of £100 and make minimum regular monthly savings of £25, while The Share Centre has no minimum Lisa savings requirements. Nutmeg users have to make an initial £100 contribution, but there are no other requirements.
Other stock brokers – AJ Bell, Charles Stanley Direct and Fidelity – all said they’d be launching a Lisa in the future.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.