The chancellor announced that from April 2017 you’ll be able to have a Lifetime ISA if you’re aged between 18 and 40 and pay in £4,000 a year. How will it work and should you have one?
Lifetime ISA – how will it work?
In his Budget, the chancellor outlined how the Lifetime ISA would work. This is what we know:
- You’ll be able to take out a Lifetime ISA if you’re aged between 18 and 40. You’ll be able to pay into a Lifetime ISA until you’re aged 50.
- You can pay in up to £4,000 a year and get a government bonus. There’s no maximum monthly amount that you can pay in – although ISA providers may set their own limits.
- As with ordinary ISAs, a Lifetime ISA will be tax free when you cash it in.
SAVVY TIP: This means that the maximum you’d be able to pay in would be £128,000, with the government contributing a maximum of £32,000. The government says that it will look at ways (with the financial services industry) of letting people contribute more than £4,000 a year into a Lifetime ISA, although this wouldn’t qualify for a bonus.
- For every £4 that you pay in, the government will pay in £1, up to a maximum of £1,000 a year.
- You can use the money you’ve saved in a Lifetime ISA to buy a property costing up to £450,000 if you’re a first time buyer or for anything you like after you’re aged 60.
SAVVY TIP: You can withdraw the money to buy a property anytime after the first 12 months.
Lifetime ISAs – the detail
The government has given some more detail about how the Lifetime ISA will work.
- You will be able to have more than one Lifetime ISA in your life but you’ll only be able to pay into one in any one tax year.
SAVVY TIP: This means you’ll be able to have one cash ISA, one stocks and shares ISA and one Lifetime ISA in each tax year, should you want to.
- Money you pay into a Lifetime ISA is included in your overall ISA limit (which will be £20,000 from April 6th 2017). The Lifetime ISA payment of up to £4,000 a year is not on top of your ISA allowance.
- You will be able to transfer money from one Lifetime ISA to another, to get a better deal or return (as you can with ordinary cash and stocks and shares ISAs).
- You will be able to transfer money from an existing cash or stocks and shares ISA into a Lifetime ISA. As is the case with ordinary ISAs, money that you transfer from an ISA, that’s been paid in during previous tax years doesn’t affect your Lifetime ISA limit.
SAVVY TIP: For one year only, from April 2017 – 18, you’ll be able to transfer in money from your Help to Buy ISA.
- The rules for a Lifetime ISA will be similar to that of a stocks and shares ISA in terms of what the ISA can invest in etc.
- The government bonus will be paid at the end of each tax year. The ISA manager will claim the bonus on your behalf.
SAVVY TIP: If you want to buy a house halfway through a tax year, you’d be able to claim your bonus there and then and wouldn’t have to wait until the end of that tax year.
- As with the Help to Buy ISA, you’ll only be able to use the Lifetime ISA to buy a property if you’re a first time buyer. You won’t be able to qualify for the government bonus if you’re buying a property to rent out.
Closing a Lifetime ISA
As mentioned, you’ll be able to cash in your Lifetime ISA when you buy your first home (or you can withdraw some money and leave the rest where it is) or when you’ve reached 60. You’ll also be able to cash in your Lifetime ISA when you’re terminally ill and are expected to have no more than 12 months to live.
SAVVY TIP: The rules for the Lifetime ISA haven’t been finalised yet and the government is also looking at letting people take money out of their Lifetime ISA for other ‘life events’.
If you cash in your Lifetime ISA for others reasons, under the current plans you’d lose the government bonus (and any interest or growth that you’d received on that bonus) and would have to pay a 5% charge.
The government is also looking at whether you should be allowed to borrow up to 50% of the value of your Lifetime ISA, without penalty, as long as you pay it back in full.
The final rules will be published in the autumn.
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