Since 6 April 2017 an individual aged between 18 and 40 can invest up to £4,000 a year into a new tax free Lifetime Individual Savings Account (LISA).
This forms part of the overall maximum ISA investment limit of £20,000 per tax year – £4,000 in a LISA and the rest in cash, stocks and shares and Innovative Finance ISAs
The LISA investment can be made by way of cash savings or stocks and shares. At the moment, only the stocks and shares option is available, but it is expected that banks and building societies will offer a cash LISA later this year.
Savers will not pay tax on any interest, income or capital gains from cash or investments held in a LISA.
The advantage of the LISA, which effectively replaces the Help to Buy ISA, is that the government will top up the investment with a 25% bonus. If you save £1,000, you will receive an extra £250. Saving the full annual limit of £4,000 will result in a bonus of £1,000.
The bonus is paid every year until the investor reaches 50, and is added on an annual basis, though from next year it will be added monthly. Once a saver reaches 50, no more payments can be made into the LISA.
The LISA is designed to be used towards a deposit for a home, or for retirement after 60. If not being used to buy a home, once a LISA saver reaches the age of 60, he/she can withdraw all the funds tax free.
Provided they opened a LISA before reaching 40, investors over 40 can continue to invest in the account.
A saver who invests £4,000 every year into a LISA from the age of 18 will receive £32,000 in bonuses before any interest or growth (assuming the limits remain the same).
The money in a LISA can be withdrawn without penalty provided it is used towards a first home (worth up to £450,000), or if the saver is over 60 or terminally ill.
Two LISA savers can buy a first home together and use both account bonuses. If buying a home with someone who is not a first time buyer, they will not be able to use their LISA without incurring a penalty.
A LISA must have been open for at least 12 months before the funds can be withdrawn to buy a first home.
Withdrawing money for any reason other than for a home or retirement will incur a penalty. The government will levy a 25% charge on the total amount in the account to not only reclaim the bonus paid, but also to take a slice of any interest or investment growth.
For example, on an investment of £100, the government will pay £25. But early withdrawal will result in a 25% charge, leaving just £93.75 (6.25% of the savings).
Savings in a Help to Buy ISA can be transferred into a LISA, or an individual can continue to save into both – though only the government bonus from one can be used to buy a first home.
In 2017/18 only, the total amount in a Help to Buy ISA as at 5 April 2017 can be transferred into a LISA without affecting the £4,000 limit.
LISA savers do not have to stay with the same provider if a better deal comes along. They can switch to another LISA provider without penalty. However, a penalty will be imposed if the account is transferred into a different type of ISA.
More than one LISA can be held concurrently, provided that in a particular tax year payments are made into only one. A saver can transfer the current year’s money around, provided it is all transferred at the time.
If you would like to discuss opening a Lifetime Individual Savings Account or other investment wrapper, please contact your usual Bishop Fleming adviser.
Posted by Ian Saunders on June 22, 2017
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