One of the only bright spots in the annual budget was the announcement of a new ISA to bring the first rung of the property ladder within reach of first time buyers. Called the Lifetime ISA (LISA), it is due to be launched in April 2017. The fine details are still to be ironed out but investors will receive an additional 25% on top of the gross amount they save.
For example, if you saved £1,000 per year, you would get a bonus of £250, making your annual contribution equal to £1,250. Once paid into the account, the bonus is considered part of your investment and will earn interest. It will be possible to earn up to £32,000 across the ISA’s lifetime.
So What’s the Catch?
Investors can continue to make payments until they are 50, but need to be between 18 and 40 to start making contributions. The maximum amount of bonus which can be paid each year is £1,000, meaning that any annual investment over £4,000 will not be considered. If you want the full £32,000, you will have to contribute £4,000 every year between your 18th and your 50th birthday.
Money in the ISA can only be used for one of two purposes: to go towards a first-time buyer’s home worth £450,000 or less; or to be saved until the investor’s 60th birthday when it can be used for retirement. Whichever way you choose you will not have to pay tax on any of the money when you decide to withdraw it.
Anyone who has ever owned, or jointly owned, a residential property – house or flat – is not eligible to take out a Lifetime ISA. If you are withdrawing the money before your 60th birthday it will be paid directly to the solicitor or conveyancer. If the purchase falls through the money is returned to your ISA and you will still earn that year’s bonus on it.
Apart from the 25% bonus, one of the benefits of the Lifetime ISA is that it doesn’t have to close if you withdraw funds to buy a property – you can continue to use it to save for retirement and still get all the benefits. Money withdrawn after the age of 60 doesn’t have to go into a pension, and you don’t have to take it all out at once.
Before you rush off and sign up for a LISA it is worth speaking to an independent financial advisor as you might find that you are better off with a different ISA, or a traditional pension.