Harnessing the simplicity and popularity of the ISA wrapper
The introduction of the new Lifetime Individual Savings Account (LISA) next year is aimed at helping young people save flexibly for the long term throughout their lives, and simultaneously enabling them to save for a first home and for their retirement without having to choose one over the other.
Simplicity and popularity
LISA is designed to work in conjunction with existing ISA products and be simple for savers to use by harnessing the simplicity and popularity of the ISA wrapper where contributions are made out of post-tax income but investment growth on savings and future withdrawals are tax-efficient.
From April 2017, people under the age of 40 will be able to open a LISA and contribute up to £4,000 in each tax year. The Government will then provide a 25% bonus on these contributions at the end of the tax year. This means that people who save the maximum each year will receive a £1,000 bonus each year from the Government. Savers will be able to make LISA contributions and receive a bonus from the age of 18 up to the age of 50.
The bonus will be paid into the LISA at the end of each tax year so that savers will also benefit from tax-efficient growth on the bonus from the time it is added. For example, a £4,000 contribution made by a 25-year-old into a LISA which grew at 4% a year would be nearly five times larger due to the government bonus and investment growth by the time they reach 60.
Over their lifetime, savers will be able to have contributions of £128,000 matched by the Government for a maximum bonus of £32,000, with investment growth on both their contributions and the government bonus. Tax-efficient funds, including the government bonus, can be used to buy a first home worth up to £450,000 at any time from 12 months after opening the account. The funds, including the government bonus, can be withdrawn from the LISA from age 60 for any other purpose.
Valid bonus claims
LISA managers will claim the bonus due on the accounts they manage from HM Revenue & Customs (HMRC) who will pay valid bonus claims (up to a maximum of £1,000 per person per tax year). Where the individual is purchasing a home having contributed in that same tax year, they will be able to receive their bonus and will not have to wait until the following tax year.
Individuals will be able to open a LISA from the age of 18 until they turn 40. Opening a LISA will, in most ways, be identical to opening a regular ISA under the existing rules. Individuals will be able to open more than one LISA during their lives but will only be able to pay into one LISA in each tax year.
Saving into a LISA will also be very similar to saving into any other ISA. For example, contributions will be made with the individual’s own cash. Qualifying investments in a LISA will be the same as for a Cash ISA or Stocks & Shares ISA. Individuals will be able to transfer their LISA within 30 days between providers to get the best deal in line with the existing ISA rules. Any contributions to a LISA will sit within the overall ISA contribution limit (£20,000 for 2017/18).
Individuals will be able to transfer savings from other ISAs as one way of funding their LISA. In line with existing rules, transfers from previous years’ ISA contributions do not affect that year’s £20,000 overall ISA limit. During 2017/18 only, additional transfers may be made from the Help to Buy ISA and the government bonus will be kept on those savings.
Overall ISA limit
The Government said they want to make it as easy as possible for individuals to save additional funds on top of those receiving a bonus (for example, if they want to contribute more than £4,000 a year or keep contributing after age 50). Savers will be able to contribute to one LISA in each tax year – as well as a Cash ISA, a Stocks & Shares ISA and an Innovative Finance ISA – within the new overall ISA limit of £20,000 from April 2017.
Where people choose to withdraw savings from the LISA to make a first home purchase, they will be able to withdraw up to 100% of their LISA balance, including the government bonus. They will receive the benefit from compound growth because the government bonus is paid each year, but their withdrawal can only be put towards a first home located in the UK with a purchase value of up to £450,000.
Minimum holding period
There will be an initial minimum holding period of 12 months from account opening before withdrawals that include the government bonus can be made for a home purchase, and, if you are buying your first home with someone else, you can each use a LISA and each benefit from the government bonus.
The detailed rules will be based on those for the Help to Buy ISA and will be open for new savers until 30 November 2019, and open to new contributions until 2029. Savers will be able to save into both a Help to Buy ISA and a LISA but will only be able to use the government bonus from one of their accounts to buy their first home.
During the 2017/18 tax year only, those who already have a Help to Buy ISA will be able to transfer these funds into a LISA and receive the government bonus on those savings. Any Help to Buy ISA funds that were saved prior to the introduction of the LISA on 6 April 2017 will not count towards the LISA annual contribution limit.
Full or partial withdrawals can be made from age 60. The withdrawal (including the bonus) can be used for any purpose and will be paid free of tax. Funds can remain invested, and any interest and investment growth will be tax-efficient. Where people are diagnosed with terminal ill health, they will be able to withdraw all of the funds (including the bonus) tax-efficiently, regardless of the individual’s age. The definition of terminal ill health will be based on that used for pensions.
The LISA will have the same Inheritance Tax (IHT) treatment as all ISAs. Upon the death of the account holder, the funds will form part of the estate for IHT purposes. Their spouse or registered civil partner can also inherit their ISA tax advantages and will be able to invest as much into their own ISA as their spouse used to have, on top of their usual allowance.
The Government will also explore whether savers should be able to access contributions and the government bonus for other specific life events.