In the 2016 Budget, George Osborne introduced the concept of the Lifetime ISA (LISA) as a mechanism by which people under 40 can save up to £4,000 a year which the government will top up by 25%. The Savings (Government Contributions) Bill was introduced to the House of Commons on 6 September 2016 which attempted to pave the way for a clear and simple approach to LISAs, however in reality, some key questions remained unanswered.
As a result, the government has recently published an updated design note which follows on from the Bill and goes into a significant amount of detail as to the mechanics of the LISA. Although there is considerably more detail contained in the note, the main points to be aware of are as follows.
- Opening a LISA – banks, building societies and investment managers should be able to provide LISAs from April 2017 to individuals at any point between their 18th and 40th birthdays.
Saving in a LISA – there is no monthly contribution limit for individuals and although payments should generally be made in cash, shares from certain tax-advantaged employee share schemes or other ISAs can be transferred to a LISA. New amounts contributed will count against the overall ISA limit, which will be a new limit of £20,000 from April 2017, as well as the Lifetime ISA limit. Individuals can open more than one LISA but they can only contribute to one LISA each tax year.
The government bonus – this should be claimed at the end of the 2017-18 tax year and then monthly thereafter. However, the bonus is linked to the contributions paid in, not the investment returns. Although this section of the note is lacking detail, it does state that the government are keen for LISAs to be transparent so more guidance will follow.
- Transfers – transfers of LISAs can be made between providers. During the 2017-18 tax year only, funds built up before 6 April 2017 can be transferred from an existing Help to Buy: ISA to a LISA without them counting towards the Lifetime ISA contribution limit.
- Withdrawals for a first home purchase – 100% can be withdrawn including the government bonus up to the value of the deposit, which must be for a house under the value of £450,000 located in the UK which the first time buyer will live in as their only residence. When buying a first home jointly with another person who has a LISA, both individuals can use their LISA and each benefit from the government bonus. If a purchase falls through, the funds must be returned to the LISA although any interest accrued may be paid directly to the individual.
It seems the LISA will not interact with an employer’s auto-enrolment arrangements and the Financial Conduct Authority are consulting on areas where risk warnings have to be issued to workers planning to opt out of an employer’s workplace pension. These include:
- Loss of employer auto-enrolment contributions on an opt out to a LISA
- Better tax relief for higher rate taxpayers on pension contributions.
- Pensions have a maximum exit fee of 1% and most have no exit fee at all. The LISA’s exit fee is 6.25% unless monies are withdrawn for one of the three approved lifetime events.
- Saving into a LISA stops at age 50 but pension contributions can continue to age 75.
- Workplace pensions have a pre-selected default fund but an investor in a LISA needs to select their own investments and investment strategy.
- An individual can receive cash from a pension at age 55 but the bonus on retirement is only payable at age 60 for a LISA.
Please contact Penny Cogher or your usual member of the team if you would like further information including the LISA’s interaction with the Help to Buy: ISA or for advice on reviewing your current remuneration arrangements and implementing change.