People will have a brand new flexible way of saving for their first home or for retirement from April 6, 2017 with the Lifetime ISA, or LISA.
Although targeted at the 18-40 year-olds, parents and grandparents can pay into a LISA to help adult children and grandchildren get on the property ladder and kick-start saving for retirement. Similarly to ISAs, contributions are paid from taxed income, and investment growth and payments are tax-free. The difference is that the government will add a bonus in return for contributions saved in a LISA.
While in theory a LISA addresses two of the big challenges young people face today, buying their first house and taking responsibility to save for their retirement, in practice it’s either one or the other. It's never too early to start saving for retirement, and saving for a house won’t remove this need. This is where parents and grandparents can support children's and grandchildren's saving's objectives.
A LISA has the following features:
- Anyone aged between 18 and 40 can open a LISA account from April 6, 2017. LISAs are expected to be offered by a variety of financial institutions such as banks, building societies and pension companies.
- The government will add a £1,000 bonus for every £4,000 saved each year; the bonus is only paid until the saver's 50th birthday. People can pay in more than this, but they won't get any more bonus.
- A LISA gives savers the flexibility to save for a deposit for their first home or for retirement, in one account.
- If saving for a house they can cash in their account to put a deposit towards their first UK home worth up to £450,000 at any time after 12 months of opening the account.
- If saving for retirement, they can cash in their fund any time after their 60th birthday. There are no restrictions on how they use their funds. Funds can be withdrawn in full before age 60 if someone is in terminal ill-health.
- Unlike pensions, employers can't pay into a LISA. Employers contributions are extremely valuable and can help people save for retirement more quickly than if they had to do it by themselves.
- Savers can access their account at any time. But they will lose the government bonus and investment growth on it, and face a 5 per cent exit penalty, if they withdraw their LISA funds before age 60 for a reason other than putting down a deposit for their first home or due to terminal ill-health.
- Any LISA savings will be counted towards the overall ISA limit, which increases to £20,000 in April 2017.
- Savers will have the choice of saving in cash or stocks and shares, just like the standard ISA. Cash might suit house purchase, while stocks and shares are more likely to suit retirement savings.
- Like ISAs, contributions to a LISA have to be made with the individual's cash. So grandparents will have to effectively gift amounts to their grandchildren, rather than pay it direct into their LISA. They will have to rely on their grandchildren to pay the amounts into a LISA.
- The current Help-to-Buy ISA will be open to new savers until November 30, 2019. Savers will be able to save in a Help-to-Buy ISA and a LISA but will only get the bonus from one account. There will be special one-off rules in 2017/18 regarding transfers of Help-to-Buy ISAs to LISAs and the government bonus. Transfers will be allowed after this date, but new rules will apply on the bonus.
Thanks to Kate Smith at Aegon.
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