Lifetime ISAs or ‘LISA’s.
There are bonuses available for first time buyers, but are they really advantageous for retirement saving?
If you are saving up to buy your first home you need to know about the new Lifetime ISA. They are also designed to encourage saving for retirement.
It is important to note that ‘consultation’ is ongoing regarding some aspects of the new LISA accounts, so be warned, the information below is subject to change!
What is the Lifetime ISA?
- The new Lifetime ISA will be available from 6th April 2017
- It is a savings plan which anyone aged from 18 up to 39 can open. If you are 40 on 6th April 2017 (or were born before 7th April 1977) you can’t have one.
- You can pay in up to £4,000 per annum until you are 50 years old. You can pay in regular amounts or lump sums as and when they are available.
- The £4,000 limit is part of your overall ISA contribution limit for the tax year. This will be £20,000 in 2017/18
- There is no tax to pay on interest, capital gains or dividends earned on the investments you choose for your plan. You can hold cash or stocks and shares.
- At the end of the 2017/18 tax year, the Government will pay a bonus of 25% of the amount you have contributed into your account. So that’s £1,000 if you pay in the full £4,000!
- In following years you will also get a 25% bonus added monthly to any new contributions you make within the £4,000 per annum limit. So if you maximise contributions and keep going until you are 50 then you would have received a £32,000 (+ interest) gift from the Government! This is assuming they don’t change the rules!
- You can take money out of the account at any time but you will only receive the bonuses if you are using the funds as a deposit on your first home or have reached the age of 60. All withdrawals are tax free.
Good News For First Time Buyers
According to Homes & Property (21st November 2016), first-time buyers are paying an average of £15,000 more for a starter home than last year.
For example, two people, who have never owned any property before, could save £4,000 each a year for 3 years to buy their first home together:
Total £15,000.00 x 2 = £30,000 – £6,000 contribution received. This does not include any interest accrued which can be added to the figure.
LISAs – Important things to remember:
- Firstly, you don’t have to have a partner! Each individual can have their own account.
- You don’t have to put a full £4,000 in each year but you will receive a bonus of 25p for every £1 you save and your bonus will also earn interest.
- If you are saving to buy a property jointly, both people must never have owned any property or part of a property before. If one person has owned property previously, only the one who hasn’t will qualify for the bonus.
- You cannot purchase a property with the intention of renting it out – it must be used for your own home or you will lose the bonuses.
- You must be applying for a mortgage in connection with your purchase – you cannot use the monies as part of other funds you have in order to complete a cash purchase or you will lose the bonuses.
- This is a savings account, so potentially could reduce your eligibility for pre-pension-age benefits or tax credits
- You must hold the account for a minimum of 12 months and the value of the property you intend to buy must be under £450,000 to qualify for the bonuses
Help to Buy ISA’s (H2B) are still available until November 2019 if you are not eligible for a LISA. Generally, the LISA is better but there is no upper age limit for H2B.
LISA for Retirement Savings
If you are planning to use a LISA for Retirement savings, the advantages over existing pension plans are less clear.
For basic rate tax payers the bonus is effectively the same as the tax relief applied to pension contributions. For example, £80 from your net income into either a pension or a LISA results in £100 in your plan. For higher rate tax payers the pension plan is better as getting £100 into their pension only costs £60.
Depending on how much you earn, you can pay much more into a pension plan than a LISA but if you are already paying as much as you are allowed into a pension plan, a LISA may be a useful way to top up retirement benefits further.
When is a Pension Plan better than a Lifetime ISA?
- Auto-enrolment means your employer (if you have one) has to match some of your contributions in a pension; they don’t in a LISA. This is a big advantage of pensions.
- You may also get national insurance and salary sacrifice gains from pension saving through an employer that you wouldn’t get with a LISA.
- Pension contributions don’t have an impact on your benefit entitlement but LISA savings may.
- If you are eligible for a LISA you will be able to take money from your pension once you reach age 57 but you need to be 60 to access LISA savings without penalty.
When is a Lifetime ISA better than a pension?
- When you take your pension you can only take 25% of it as a tax-free lump sum – the rest you pay income tax on. However, you can withdraw all your LISA fund in one go without paying any tax once you are age 60.
- A LISA is more flexible because you can access money at any time, whereas with a pension you won’t be able to touch any of the money until you are 57 but you need to remember there are penalties for accessing the LISA pot before age 60 and you will lose bonuses if the money is not being used for first time house purchase.
Saving for your First Home
The Government’s idea behind these accounts is to encourage young people to begin to think about saving for retirement at the same time as they think about buying their first home as far too many people leave it until too late to begin saving for a pension. This seems like a good idea, although each is equally important, they generally require different investment strategies
Short term savings over a 3-5 year period in order to accumulate a deposit for property will generally be best held in cash funds. Most Banks and Building Societies, although not all, are likely to offer cash LISA accounts and it will simply be a question of shopping around for the best rates. It may be possible to transfer LISAs if better rates become available after an initial account has been set up.
Saving for Retirement
LISAs are designed to hold longer term retirement savings for a minimum of 10 years and over this period of time, a cash fund is much less likely to be appropriate. With interest rates as low as they are, and unlikely to rise much in the foreseeable future, cash funds over the longer term run the very real risk of their purchasing power being eroded by inflation. We need to look at other asset classes for retirement planning, where there is real potential for capital growth and the prospect of a pension we can actually afford to live on!
Lifetime ISAs – Tailored Advice for YOUR situation
This article does not cover all aspects of these new accounts and the implications for everyone. Everyone is in a different situation and needs different advice.
At HGH Wealth we are here to tailor that advice for you so you can understand if a LISA really is likely to be advantageous as part of your retirement planning or whether your existing, or a new pension plan would be better.
Call us on 01904 655202 to make an appointment to come in and chat to Nick Lawson about your own situation and establish the best course of action for yourself. Alternatively email firstname.lastname@example.org. We look forward to speaking to you soon.
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