From April 2017, savers aged between 18 and 40 can open a new Lifetime ISA (“LISA”). Announced during the March 2016 Budget, the LISA is, according to HM Treasury, designed to help young people to save “simultaneously… for a first home and for their retirement, without having to choose one over the other”.
Any amount up to £4,000 can be saved into a LISA each year between the ages of 18 and 50. LISA savers will receive a 25% annual government top-up, to a maximum of £1,000 per year. A LISA that is opened at the age of 18 offers the opportunity for 32 years of saving and bonuses. If you save the annual maximum of £4,000 per year over 32 years – a total of £128,000 before any capital growth or interest is included – this could net a total government bonus of £32,000.
The money saved into a LISA may be used towards a deposit on a first home worth up to £450,000 or can be saved until the age of 60 to fund retirement. Any contributions to a LISA will sit within the overall annual ISA allowance of £20,000 for the tax year 2017/18.
LISAs are limited to one per person rather than one per household; therefore, two first-time buyers will both receive the government bonus when they buy a home together. Meanwhile, the “Help to Buy ISA” will remain open to new savers until 30 November 2019 and open to new contributions until 2029. Savers can save into a “Help to Buy ISA” and a LISA, but may only use the government bonus from one account to purchase their first home. If you make any withdrawals before the age of 60 that are not for the purpose of buying a first home, you will lose the government bonus and incur a 5% penalty charge.
If you use your LISA to fund your retirement, you can withdraw all the money after your 60th birthday, free of tax. In comparison, when you withdraw money from your pension pot, only 25% of that sum is tax-free. Nevertheless, a LISA is not necessarily a substitute for saving into a pension scheme. Pension contributions enjoy significant tax breaks; moreover, employees benefit from their employer’s contributions to their workplace pension scheme, so take expert advice before making any decisions.