From April, a new type of tax-free savings account is launching, offering savers the chance to get their hands on as much as £32,000 absolutely free from the government.
The lifetime ISA was announced last year in George Osborne’s final Budget as Chancellor of the Exchequer, and is designed to help the under-40s beef up their savings towards a deposit on their first home or for their retirement.
Not everyone’s a fan though. So what do you need to know about the lifetime ISA? And will it be worth opening one?
How does the Lifetime ISA work?Savers can put up to £4,000 a year into a lifetime ISA, whether that’s all in one go or in regular payments. The government will then top those savings up by 25%, initially on an annual basis, and then on a monthly basis from April 2018.
So, save £4,000 of your own cash and the government will drop in a further £1,000.
They will pay that bonus until you reach the age of 50. So open one when you are 18, save the maximum every year, and you’ll pocket a cool £32,000 from the Government, on top of the interest you earn on your balance each year.
What can I use it for?The lifetime ISA has two main benefits. If you get your hands on the cash before the age of 60, you need to put it towards a deposit for your first property to keep the bonus.
But you can’t have ever owned a property, or even a share of a property, in the past.
After the age of 60, you can take the money out to support your lifestyle in retirement, and can spend it on whatever you like.
You say LISA, I say IFISA
The lifetime ISA is yet another addition to the MANY different types of ISA already available, all of which do slightly different things.
First, there’s the standard ISA. You have an annual allowance of £15,240 (rising to a whopping £20,000 from April) and can put that money into cash, stocks and shares, or a bit of both.
Alternatively, you can put some of that allowance into an innovative finance ISA . This is a new way to benefit from tax-free returns on peer-to-peer investments.
While these officially launched last year, only a handful of providers have been given approval to offer them so far, with almost none of the big names among that group as yet.
Then there is the help to buy ISA , which is designed to help people save towards their first deposit. Like the lifetime ISA, it also offers a 25% bonus from the government on your savings, though the bonus is capped at £3,000.
If you have children to save for, don’t forget the junior ISA either, which allows you to save up to £4,080 each year free of tax. The child can then get their hands on the money once they are 18.
The lifetime ISA vs the help to buy ISA
There are a few key differences between the lifetime ISA and the help to buy ISA that are worth noting.
With the lifetime ISA, the money needs to go towards a property costing less than £450,000.
In contract, with the help to buy ISA you can only put the cash towards a property costing up to £250,000, unless it is in London in which cash the maximum jumps to £450,000.
If you want to put the savings you’ve built up in your lifetime ISA towards buying a property, you need to have had the ISA open for at least 12 months.
There are no such restrictions with the help to buy ISA, so if you’re planning on buying before April 2018, that’s the one to go for.
However, with a help to buy ISA, you can only save in cash. With savings rates in the doldrums, putting your money into stocks and shares is a more attractive - though risky - option, which you can do with a lifetime ISA.
The lifetime ISA vs pensions
One selling point of the lifetime ISA is the flexibility.
If you are planning to use it for your retirement, but your circumstances change and you desperately need that money, you can get your hands on it, albeit with a 25% penalty on the amount withdrawn.
You can’t do that with a pension - the money you save in your pension is locked away, out of reach, until you hit 55.
When the time comes to access your pension, you can get 25% of it tax-free. You’ll have to pay income tax on the rest.
However, with a lifetime ISA, you can get your entire savings pot without the taxman taking a penny.
But if your priority is building the biggest possible pension pot then a traditional pension is still your best bet.
Not only do you benefit from a government top up at your income tax rate (so 20% for basic rate taxpayers), but thanks to auto enrolment your employer is now duty bound to contribute too.
With compound interest, the longer you save with these additional contributions, the bigger your pension pot will be.
Employers don’t have to make these contributions to a lifetime ISA.
Former pensions minister Baroness Ros Altmann has warned that the lifetime ISA is a “danger” to pensions, and could confuse people into giving up valuable employer contributions.
Who will offer one… and who won’t?Currently the only people confirmed to offer a lifetime ISA when they launch in April are Nutmeg and Hargreaves Lansdown.
A host of savings and investment giants, like Halifax , Santander and Hargreaves Lansdown have confirmed said they have plans to offer one, but they haven't released full details yet.
However, Nationwide , the UK’s biggest building society, has opted against offering one, while Standard Life has declared it won’t be offering one from April, though it intends to launch one in the future.
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