The content of the Chancellor’s budget in March was somewhat of a surprise for many. Many of the aforementioned pension reforms that had been anticipated were thankfully not introduced, with a number of unexpected announcements made in their place.
One of these was the announcement of the introduction of a new type of savings vehicle – the Lifetime ISA. Now the dust has had time to settle on the announcement, it’s time to consider what this new type of ISA will mean for savers and investors and how it can best be used.
What do we know so far?
Launching on 6 April 2017, anyone aged between 18 and 40 will be able to open a lifetime ISA. It will act as a complimentary savings scheme for younger savers, not a replacement for traditional pensions. Individuals will be able to contribute to their Lifetime ISA and will receive a government bonus on contributions up until the point they turn 50. This bonus will be paid annually initially (before being paid monthly from 2018) at a level of 25%, up to a maximum bonus of £1000 per year.
Lifetime ISAs will work very similarly to the current cash and stocks and shares ISAs in that an individual will be able to open a new one each year via a bank or building society.
Contributions will be made with the individual’s own cash and as with the other types of ISA, transfers from other ISAs can also be made without adding to that year’s contribution total.
There will be no monthly contribution limit and individuals will be able to add up to £4000 of ‘new money’ into a Lifetime ISA each tax year as well as continue to hold cash and stocks and shares ISAs. The only caveat to this is that the maximum level of total contributions any one individual can make to their ISAs during the tax year will be capped. In 2017 – 2018 the total ISA contribution allowance will be £20,000.
Unlike existing cash and stocks and shares ISAs, the new Lifetime ISAs will have strict rules regarding the extraction of cash. The aim of the account is to encourage younger people to save for their future and as such, penalty free withdrawals will only be allowable when making a first time house purchase or after the age of 60. Any withdrawals prior to the age of 60 will lose any government bonus that has been applied and will be subject to a 5% charge.
The only exceptions to this will be upon diagnosis of a terminal illness and the occurrence of other potential ‘life events’, currently under consultation.
Whilst the new Lifetime ISA presents an interesting option for savers, the restrictions, particularly those around withdrawal, means they won’t be suitable for everyone. In our next blog we’ll be looking at Lifetime ISAs and comparing them to pensions as a means of saving for and funding retirement.
In the meantime, if you need any advice in relation to planning for your future, please contact our team of independent financial advisers.