Lifetime ISAs are coming – your questions answered
The new Lifetime ISA (or Lisa) is heading our way.
From April next year you’ll be able to start saving and investing using this new product – so long as you qualify.
We’ve been asked lots of questions about this new product, so here’s our handy Q&A to explain what the Lisa is all about …
First off, if you’re under 18 or over 40, stop reading now. The Lisa is not for you.
But, if you are between those ages, read on because this is a very interesting product and especially so if you want to save a deposit for buying a house.
Quick interjection to remind you to join our community of money savers by whacking your email into the box at the top (it's completely free).
Now, let's get back to ISAs.
What is the Lisa?
It’s a new version of the government’s tax-free savings and investment vehicle.
There is already a glittering array of ISAs – cash, stocks, junior and help-to-buy.
The Lisa works somewhat differently, but at it’s heart, it offers the advantage that you don’t pay tax on what you earn in interest or investment gains.
Apart from gains being free of tax, what else does it offer?
The government will top up what you invest by 25%, which sounds like a pretty good deal.
You put in £100 and the government will add another £25.
But it will only do this until you’re 50 years old.
Is there a limit on what can be saved?
Yes … and no.
The 25% bonus only applies up to £4,000 of savings a year. You can, though, add more money, but you won’t get the top up.
There is a limit on what you can invest in ISAs overall every year and this is spread across all ISAs you have.
From next April, the start of the financial year, the limit will rise to £20,000 on cash, stocks, innovative finance and Lisas.
You can put money into different kinds of ISAs in one year, so long as your total allowance overall is not exceeded for that year.
When April rolls round again, you can add more money in any ISA you have previously opened, or open a new one.
But, here’s the catch – the government’s generous £1,000 for every £4,000 you put into your Lisa is paid only until you’re 50.
But you can’t get at the money until you’re 60, unless you’re buying a first home.
What will I get overall?
What you earn overall will depend on how well your stocks Lisa does or what rate your cash Lisa pays, so you’ll need to shop around for the best deal.
But in terms of the extra cash the government will pay …
… take out a Lisa when you’re 18, then keep putting in the £4,000 maximum every year until you’re 50, and you will get a bonus pot of £32,000 in today’s money.
We say ‘today’s’ money because the yearly limit is likely to be increased as inflation goes up.
On top of this amount, of course, is the tax-free element of any ISA. If you’re currently a basic rate tax payer, that’s a 20% saving.
One thing to beware of!
One thing to be very careful of is that you are perfectly entitled to shop around for ISAs that pay the best rates of interest, or that seem to be performing better and this will apply to the new Lisa.
But in order to transfer, do not withdraw money to put into another product.
To keep your tax advantages, you must keep the ISA wrapper in place and let the ISA providers handle the transfer. This way your money stays protected in the tax-free ISA wrapper.
When does the government pay the 25% extra?
Next year, the first year Lisas will be available, the bonus will be added at the end of the year. But after that it will be paid every month, which is good news as it means savers will benefit from compound interest – interest on the bonus.
What can I do with the money?
This is where the ‘Lisa’ bit kicks in – there are, as the name suggests, restrictions.
* If you take money out before you’re 60, you’ll have to hand back the bonus AND a 5% charge.
* If you take the money out after 60, there’s no penalty and no tax to pay.
* You can take the money out early without penalty only if you then use it towards buying a first home of up to £450,000.
What happens when I’m 60?
Once you hit 60 years old you can take all or part of the money you’ve saved or sell the stocks in your and take the proceeds without paying tax or any penalty.
You must reach 60 before you can take out all or part of the money
Where can I buy a Lisa?
These products will be sold as other ISAs by banks and building societies or by other financial providers. If you’re buying a stocks and shares Lisa, you’ll probably use a fund supermarket.
You can open a Lisa and add to it each year, or you can open several in one year or separate ones in consecutive years, so long as your overall investment limit isn’t breached.
What about the new £1,000 tax-free interest on savings I can earn anyway?
New rules lessen the tax advantage of cash ISAs for many people because you can now earn up to £1,000 interest a year on cash without paying tax in any savings account, if you’re a basic rate taxpayer – half this amount if you pay tax at the higher rate, or nothing if you pay tax at 45%.
At 1% interest, that would mean you’d need over £100,000 in an account before you needed to worry.
But be aware, this is £1,000 of interest a year across ALL cash investments – bank accounts, savings, building societies, bonds, government gilts, everything.
Also, it's worth remembering that while £1,000 a year interest seems a lot now with our current pitiful interest rates, if these rise then more people will need to pay tax. So saving into an ISA now could protect you from future tax.
Worth remembering … for the lucky few who are able to earn £1,000 in interest, which will be tax free, an ISA is very much worth adding to their savings portfolio because an ISA’s tax free gains don’t count towards your £1,000 allowance.
Is a Lisa a good way to save for retirement?
Once you reach the age of 60, you can withdraw all the money in your Lisa tax free and without penalty. Plus, you’ll be able to collect the bonus the government has paid in.
You don’t have to take all the money, or even part of it at 60, though and it will still maintain its tax-free status.
The government says a Lisa ISA is not meant to replace a pension, but to be in addition to it.
The generous 25% government top up is a great bonus, especially as a way for younger people to
kick start their savings.
But worries have been expressed that the Lisa might tempt people away from putting money into better overall performing workplace pensions, in which your employer matches your contributions.
Then again, it has been argued that many young people do not engage with the idea of a pension, and the Lisa is far simpler to understand and so encourages more saving.
Others have pointed out that for those saving for a first home, the Lisa ISA is a terrific deal.
But, if it’s not for a home then it really is for the long-term.
Even if you invested at the maximum age, you’ll have to wait 20 years before you can access your money without penalty. And a lot can change in 20 years.
For someone who’s 18, it means a wait of 38 years, with all the different governments and possible changes to the pension market that this timespan could involve.
And pulling money out early, unless it’s for a home, is going to be very costly indeed.
The Financial Conduct Authority has said it is vital that Lisa investors should be clearly warned before they open an account about these severe early withdrawal penalties.
The Treasury estimates 200,000 Lisas will be opened every year for four years from 2017. Others estimate that the figure could be as high as 2.25 million.
Is a Lisa a good way to save for a home?
You can withdraw some or all the money you save after the first 12 months without penalty or paying any tax if it’s to buy your FIRST home.
You can’t do this to buy an investment property, only a home, and the value cannot exceed £450,000.
These ISAs are per person, so if you’re buying a property jointly, you can both open a Lisa and take the cash out after the first 12 months and put it all towards the same property.
This seems like a win-win deal if you’re planning on buying a first home.
What about the Help-to-Buy ISA?
Unlike a Help-to-Buy ISA, you can put down both your Lisa savings AND the government bonus as a deposit once you’ve exchanged contracts on your first property.
The Help-to-Buy ISA only pays the bonus after completion, so it can't be used as part of your deposit to secure a property in the the first place.
If the sale of the property falls through – or you don’t use the cash to buy a home within three months after accessing the money – it has to be returned to the Lisa by your conveyancer.
Help-to-Buy ISAS are still available until 30 November 2019, but any money you put in will count towards your overall ISA annual limit.
There’s nothing to stop you opening a Lisa and a Help-to-Buy ISA, but you can only use the government bonus from one of these accounts to buy your first home.
During the 2017/18 tax year, anyone with money already in a Help-to-Buy ISA will be able to transfer it to a Lisa and still save an extra £4,000. But there’s a deadline for this of 5 April 2018.
Cash or stocks Lisa?
There is no definitive answer to this.
If you put your money into an investment Lisa, your money is going into stocks and shares or a fund – basically you’re investing in the stock market.
This type of investing means your money is at risk as shares go up and down in value.
If you save in a cash Lisa, your money is protected.
However, the mistake beginner investors often make is to put their money into stocks and worry if they see it fall. What is needed is to take a long-term perspective of many years.
The fact is that while stocks and shares go up and down, the general pattern over the long term is that they rise in value.
So, the general rule is that the longer you’ve got to invest, the better returns you’re likely to see from stocks rather than from a cash savings account – often by a huge margin.
But that’s not guaranteed.
The bottom line is that it all comes down to your attitude to risk and the timescale you are investing for.
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