Chartered Paraplanner Simon Hartley explains exactly how useful a Lifetime ISA can be for those looking to buy a home.
With the end of the Financial Year (5th April) fast approaching, many people take this opportunity to use up their annual tax allowances before these renew (they can’t be rolled over into the new year). Whilst most people know that they have an ISA allowance (£20,000 p.a.), not all who should know about their Lifetime ISA (LISA) allowance, or indeed how the LISA even works!
LISAs sit somewhere between the now discontinued Help to Buy ISA and pensions, in that they can be used to help both first-time buyers and those planning for retirement. Growth is tax-free and you can hold cash or stocks & shares, depending on what is most suitable for your circumstances. You must be aged between 18 and 40 to open a LISA and can only contribute until you turn 50; the amount you can pay in each tax year is currently £4,000 p.a. and this is included in your overall ISA allowance of £20,000 p.a.
As with the Help to Buy ISA, you can claim a 25% bonus on top of any contributions made into a LISA. So in other words, you can pay up to £4,000 p.a. and receive up to £1,000 p.a. in bonuses, a total of £5,000. This is similar to the level of basic rate tax relief you would receive on pension contributions. With Help to Buy ISAs, the bonus was only applied when you bought a property, and so you could generally easily withdraw your funds at any time before this if you changed your mind. LISA bonuses, however, are applied shortly after you make your contribution, although you are only entitled to them if you use the money to buy your first property or when you reach age 60. Taking money out of a LISA for any other reason would incur a 25% penalty on the amount withdrawn (although there is an exception if you have been diagnosed with a terminal illness). Remember that 25% out is not the same as 25% in, as we show in this example:
You pay £1,000 into a LISA and receive a bonus of £250 (25%); £1,250 in total. You decide that the money is better spent on a new car and withdraw it all. If you have are under 60 years old, this would incur a £312.50 penalty (25% of £1,250) and so you would end up with only £937.50 in your pocket, a loss of £62.50 on your original £1,000 contribution.
For this reason, a Lifetime ISA would only really be suitable if you wanted to use it to help buy your first home, or to save for retirement. Whilst the funds are still easier to access before retirement than those in a traditional pension product, consideration should still be given to the penalties before making a contribution.
There are other specific criteria that must be met to benefit from a LISA. To claim the 25% government bonus before age 60, you must:
- – Be buying your actual first home; you can’t own/have owned/have inherited a home in
- the UK or anywhere else in the world.
- – Be buying a property worth less than £450,000.
- – Be planning to live in the property (not rent it out!).
- – Purchase the property with a traditional repayment mortgage.
It’s worth noting that withdrawals made from a LISA in retirement would not be subject to Income Tax in the same way that money from a pension would be, and so incorporating a LISA into your retirement planning could be beneficial for giving you some extra flexibility with your income options further down the line. It’s also important to be aware that when you die, any money in your Lifetime ISA, including interest and bonuses, is passed on to your beneficiaries without penalty, although it would lose the ISA tax wrapper and would form part of your estate for Inheritance Tax purposes.
As with anything in financial planning, there’s always a myriad of factors to consider when deciding on what is the right investment vehicle for you, as even the slightest misstep can have much bigger unforeseen consequences later down the line. This is why we always recommend seeking independent financial advice from a professional before making any decisions.
Simon Hartley BA(Hons) APFS
Chartered Senior Paraplanner
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The scenario included is for information purposes / general guidance only and should not be interpreted as advised recommendations.
Information is based on our current understanding of taxation, legislation, and regulations. Any levels and based of, and reliefs from, taxation are subject to change.
The value of investments and income from them may go down. You may not get back the original amount invested.