It has been a week since the long-awaited launch of the Lifetime ISA.
Originally announced in the 2016 Budget, the LISA is available to those under 40 to invest or save on a flexible basis. Designed to fund a deposit for a first home or build retirement savings, the government will top up annual contributions – up to £4,000 – by 25%.
Why save into a LISA?
- For every £4 saved, the government will add £1
How much can be saved into the LISA?
- Only the first £4,000 will be eligible for the bonus, but more can be saved into the Isa
What can be invested?
- Cash, stocks or shares can be invested
When is the government contribution paid?
- Due to a quirk, the bonus will be paid annually during the LISA’s first year, but will be paid on a monthly basis from the start of the 2018/19 tax year
How can the money be spent?
- If over 60 when withdrawing, the money can be spent on whatever the saver wishes. It can also be used to buy a first home up to the value of £450,000. If the withdrawal takes place for any other reason and the saver is under 60, a 25% penalty will apply. Withdrawals are, however, tax free.
One of the main reasons behind the introduction of the LISA is to help first-time buyers get onto the property ladder.
- After a year of having held the account, some or all of the money can be withdrawn, penalty free, as long as it’s going towards the purchase of a first home
- More than one LISA can be used to purchase a new home, this means that couples can put their savings together in order to help them onto the property ladder
With Help to Buy Isas being phased out in November 2019, a concern for savers has been deciding whether or not to transfer their existing savings into the new LISA.
- The LISA enables the saver to use both their own savings as well as the government bonus to put down the deposit after contracts have been exchanged. This differs to the Help to Buy Isa which only pays the bonus after completion.
- The LISA doesn’t have a cap on monthly contributions; cash can be added as a lump sum.
- The LISA can go towards properties up to a value of £450,000, whereas the Help to Buy Isa can only be used for properties worth up to £250,000.
- Although both can be opened and help simultaneously, the funds saved from only one can go towards the purchase of a first home.
Commenting on the launch of the new Lifetime ISA was Paula Higgins. The Chief Executive of HomeOwners Alliance said:
“A major criticism of the Help To Buy ISA was that the government bonus couldn’t be used towards a deposit for a new home which didn’t come to light until many people had taken them out.
“It’s a welcome change to see the government has listened and addressed the criticism of the Help To Buy ISA with an ISA designed specifically for the ‘next generation’.
“The added bonus will give struggling first-time buyers the much-needed extra boost to raise the deposit.
“Recent research from our Homeowners Survey found that the ability to get on the property ladder was the biggest concern (86 percent) for 25-34 year-olds, with a further 84 per cent saying saving for a deposit was a serious problem.
“As house prices continue to rise faster than wages, more and more young professionals are being locked out of out the property market. For those on normal salaries, this latest incentive will help to bring the dream of home ownership a step closer to reality.”