The recent Budget announcement regarding the introduction of a Lifetime ISA (LISA) from April 2017 has given us plenty to think about with regard to the future of saving strategies.
We first came across the LISA back in 2014, when Michael Johnson, a research fellow at the Centre for Policy Studies thinktank, said that the Government should transform individual savings accounts into lifetime savings accounts which would incorporate both ISA-like and pension-like features.
The LISA will enable those who are under the age of 40 to save up to £4,000 in each tax year with the added benefit of the government providing a 25% bonus on the contributions paid in a tax year at the end of that tax year. This means that where the maximum saving of £4,000 has been made, the government bonus will equate to £1,000, bringing the amount invested up to £5,000 in the first and subsequent years. There will be no monthly cap on subscription amounts.
Savers will be able to make LISA contributions and receive the government bonus from the age of 18 up to the age of 50. So effectively someone who opens an account aged 18 will be able to secure lifetime savings of up to £160,000 (i.e. £128,000 saved by them and £32,000 as government bonuses). At age 50, permitted contributions can continue but there will be no government bonus payable.
Opening a LISA will be almost identical to opening a standard ISA – so an LISA manager will apply their normal account opening process which would generally include asking for the appropriate identity documents which prove the savers date of birth, National Insurance number, proof of address etc. It will also be possible for savers to open more than one LISA in their lifetime, but they will only be able to pay into one LISA in a tax year – thus the rules appear to align with the standard ISA.
The aim of the LISA appears to be two-fold – it is intended that savers will either use the funds to buy a residential property as a first time buyer or to provide an alternative or an additional retirement fund.
Tax-free funds, including the government bonus, can therefore be used to buy a first home worth up to £450,000 at any time from 12 months after opening the account. If the house is being bought with someone else, both purchasers can use a LISA and each benefit from the government bonus. The rules are based on the rules applicable for the Help to Buy ISA, so any withdrawal must be for a deposit on a first property – so effectively the withdrawal together with the government bonus will be paid directly to the conveyancer.
In other cases, while money can be withdrawn at any time, if it is withdrawn before the investor turns 60, the government bonus (together with any interest and growth on the bonus) will be lost and a 5% charge will be payable. From age 60, full or partial withdrawals can be made and will at that time be paid free of tax. If funds remain invested, any interest and investment growth will be tax-free. There are exceptional circumstances in which it will be possible to make withdrawals earlier, for example, terminal ill-health – the definition of which will align with that used for pensions.
For inheritance tax (IHT) purposes, the LISA will have the same treatment as other ISAs. Therefore, on the savers death, the funds will form part of the deceased’s estate for IHT purposes. If however the LISA is owned by somebody with a surviving spouse/civil partner, that spouse/civil partner will also inherit the LISA tax advantages and will be able to invest as much into their own LISA as the value of the deceased spouses’ on top of their usual allowance.
Finally, it is important to note however, that any contributions to a LISA will count towards the overall £20,000 ISA contribution limit from next April.
It will be interesting to see how many people will actually take advantage of the LISA as an alternative to effecting a registered pension plan for retirement planning. Of course if the desire is to get onto the property ladder for the first time, the LISA will be a more popular choice.
For ‘ordinary retirement savers’ while they will be able to make partial withdrawals, if those withdrawals occur before age 60 they come with a sting in tail as the government bonus will be lost – including any interest or growth on that bonus and a 5% charge will apply.
How attractive a LISA will be will therefore depend on the circumstances and requirements of the investor.
It will clearly be attractive for the would-be first time buyer who is 40 or under.
It will also be attractive for the person under 40 who wishes to save until age 60 – but in the knowledge that if all else fails they can get the money back before then at any age – albeit suffering the penalty of the loss of the government bonus, growth thereon and a 5% charge.
For the ‘retirement saver’ who is under age 40 and a higher rate tax payer, a pension plan will still appeal – at least under the current rules. This is effectively the case as access at age 55 is now available without the requirement to purchase an annuity but, of course, 75% of the fund will be taxable – which is not the case with the LISA at age 60.