The new Lifetime ISA launching April 2017 will be a no-brainer for first-time buyers as the state will add a 25% bonus on top of what you save meaning up to £32,000 of free cash. For retirement savings it works the same way, but whether it beats a pension or not is a much trickier conversation.
This new guide by MoneySavingExpert.com founder Martin Lewis and MSE's chief analyst Helen Saxon will take you through everything you need to know about the new Lifetime ISA (LISA), announced in the 2016 Budget... who can get it, who should, how it works, what's the best way to use it, and once it's launched which banks are the best payers.
Warning: This is a provisional guide only…
This is a totally new way to save. The information out there isn't complete yet, and even what we know is subject to consultation. So please see this as a general guide; we will keep updating it as we learn more. And of course once products are announced we'll include best buys.
The 11 Lifetime ISA need-to-knows
You can save up to £4,000 a year, and get a 25% bonus at the end of each tax year
You can save up to £4,000 a year into the LISA either as a lump sum or by putting in cash when you can. Then the state will add a 25% bonus on top. So if you save £1,000 you'll have £1,250 and if you save the full £4,000 you'll have £5,000. And that's before interest or growth. Here are the details:
- The bonus is paid until you hit age 50.
- The bonus is paid annually in the 2017/18 tax year, then monthly from April 2018 once in your account it counts as your money. You'll be paid interest on it too.
- The bonus is paid on contributions so what you put in (so for cash LISAs interest doesn't count; for shares LISAs whether the investment grows or shrinks is irrelevant to the bonus).
- The maximum bonus you could get is £32,000 (unless the rules change); to do that you'd need to open one on your 18th birthday and keep contributing the maximum £4,000 each year until you were 50.
Can I save more than £4,000 a year?
The current rules say you can only save up to £4,000 a year in a LISA. However you could still open a normal ISA for the remainder of your ISA allocation (so in 2017/18 the ISA allowance is going to be £20,000, meaning you could save whatever is left after your LISA contribution).
However the Government's consulting on whether you should be allowed to save more than £4,000 each year into the Lifetime ISA (you wouldn't get any extra bonus, even if it decides to allow it) effectively turning the remainder into a normal ISA.
Where can I open a Lifetime ISA?
They're not available until April 2017, but they'll be offered by banks, building societies and investment firms depending on whether you opt for cash savings or investments in your Lifetime ISA.
Which providers sign up to offer them remains to be seen. When we learn more, it'll go in the weekly email.
Will my savings in a Lifetime ISA affect my eligibility for benefits?
This is a savings account, and the amount of savings you have can reduce your eligibility for pre-pension-age benefits or tax credits; see 10-minute benefit check-up.
While for most people, the gain certainly for short-term savings for a property is likely to outweigh this, it is worth checking.
I'm not from the UK. Can I open a Lifetime ISA?
Yes, provided that you live in the UK when you open it and pay in to. If you then move abroad (and this goes for UK citizens too) you'll need to stop paying into the ISA (unless you're a Crown employee posted overseas).
If you permanently emigrate away from the UK, the normal withdrawal rules apply. You'll either need to use the funds for a UK residential property (not buy to let), wait until you're 60 and withdraw it then, or pay the 25% penalty to access the cash early.
Lifetime ISAs launch on 6 April 2017, and you must be aged 18 or over but under 40 when you open one
If you'll reach 40 on or before 6 April 2017 you won't be eligible for a Lifetime ISA so the earliest you could've been born to be eligible is 7 April 1977.
Yet even if you're born after that, remember you need to open it before you're 40 so if you will be cutting it close, get your skates on. Once you open it you can keep contributing and get the bonus until you're 50.
For the many people who've asked us "Isn't this age discrimination?" the answer is yes, it is. However it is not illegal age discrimination; no more than setting a state pension age is.
I'm too old or I've already got a house, what can I do?
As there's an age limit, some will invariably miss out, as Samantha pointed out on Facebook...
If you're 40 or over, or will be on 6 April 2017 when LISAs launch, you've missed out. But you still have options.
If you've not yet bought your first home you may qualify for a Help to Buy ISA there's no upper age limit to get one of these although you only have until November 2019 to open one. Read our Help to Buy ISA guide for more information, including the best-buy accounts on the market.
If that's not for you, and you want to save for a home, the new personal savings allowance means basic-rate taxpayers can earn up to £1,000 interest a year tax-free so things like bank savings accounts are the highest payers or there are normal cash ISAs too.
If you want to save for retirement, the obvious place to look is a pension see our pension savings guide for more on that.
Can I open a Lifetime ISA for my son or daughter?
Yes, sort of. ISAs are individual products, so your son or daughter will need to open their own Lifetime ISA once they're 18 or over. But you can give them money to put in it. It's worth noting if they're younger, a Help to Buy ISA can be opened from age 16, so you could start there and once they're older roll it into a Lifetime ISA (see how Help to Buy ISA becomes Lifetime ISA below).
Many worry about the tax implications of this. Yet gifts aren't taxable; you can give money to anyone you choose (as long as it is a genuine gift and not in lieu of some service). The only caveat is if you die within seven years there can be inheritance tax on it.
Can I keep on saving in a Lifetime ISA once I'm over 50?
The Government is consulting on this but we think you're likely to be able to continue to pay in to your Lifetime ISA between the ages of 50 and 60, though you wouldn't get the bonus in these years.
If it does allow it, then between ages 50 and 60 you'll still be able to earn interest on the amounts you save along with anything you've saved before you were 50 (similarly, if it's invested, you'll benefit from any investment growth).
You'll also be able to transfer the money between different ISA providers to up the rate whether it's saved or invested. But, unless you use the funds to buy your first home, you won't be able to access the money in your Lifetime ISA for retirement income until you're 60 (unless you forfeit the all the bonus payments accrued on that cash and pay a penalty on top).
The money is to be used either towards a first home worth under £450,000 or once you're over 60 towards retirement
The Lifetime ISA is designed for two specific purposes. The first is for first-time buyers to use towards a residential property, and that can be done at any time, provided the Lifetime ISA's been held for 12 months or more. The second is to take out and use in retirement once you hit age 60. With both, there is no tax to pay on it when you take the money out.
The idea behind mixing the two is a clever bit of behavioural economics. Many under-40s are turned on by saving for their first home in a way they aren't for saving for retirement, so the idea of bringing them together is that hopefully people will build up a savings habit for their first home, then carry on afterwards.
The issue with that is the strategy for short-term savings for a home and long term for retirement should generally be different. More on that later.
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For updates on the Lifetime ISA, join the 10m who get the weekly email.Using the Lifetime ISA as a first-time buyer
- You need to be buying a UK residential property costing £450,000 or less. If the home is more expensive and you still want to use your Lifetime ISA cash for the purchase, 25% of what you withdraw is taken off. It's worth noting this max property price is more generous than the Help to Buy ISA, which is for properties up to £450,000 in London but only £250,000 outside of it.
- A first-time buyer is someone who's never OWNED a property. If you've owned before, even a share of a property that was inherited whether inside or outside the UK you don't count as a first-time buyer for the purposes of the Lifetime ISA.
- You need to have it open for a year or more to be able to use it for a home. You need to have had the Lifetime ISA open for at least 12 months to withdraw cash for your first home; if you're going to buy before April 2018 then use a Help to Buy ISA.
- The money will be paid directly to the conveyancer/solicitor, not to you. When you want to buy a home, ask your ISA provider to pay the money across to the person doing conveyancing for the new home. All funds, including the bonus, will be available to use at exchange. See how buying a home works.
- The account isn't closed when you use it for a property. It's designed for buying a home and retirement, so the hope is you'll return to the account to save for retirement.
- If the purchase falls through you don't lose out. If the property purchase falls through, the funds go back to your bank or building society. This won't affect your annual contribution; you'll still be able to contribute up to £4,000 that tax year (unless you already have).
- You're not supposed to rent the property out if you use it to buy one. The Lifetime ISA is supposed to be used only for a residential property. However, we've confirmation from the Treasury that if your personal or professional circumstances change after you buy, you will be able to rent the property out...though the Government will still seek to get the bonus money back if you buy the property with the sole intention to rent it out.
Using the Lifetime ISA for retirement savings
It's worth remembering that even for the oldest people who can get a LISA, age 60 is two decades away. The rules could be changed within that time, for good or bad like any form of retirement savings.
- You can access the cash on or after your 60th birthday. Then you can use it for whatever you like, though see below for warnings on this.
- You don't have to take it all at once. You can make partial withdrawals if you don't need all the cash at age 60.
- If you leave it in the Lifetime ISA it will still get interest/growth. The Lifetime ISA doesn't simply stop at age 60, it'll still be an active product. The Treasury's consulting on when you must stop paying in we'll update when we know.
- You don't pay tax on the cash. Unlike a pension, when you take money out of a LISA for retirement, it's all tax-free.
Using the Lifetime ISA for anything else
You can take some or all of your cash out of a LISA before age 60 even if you're not buying a house. But if you do it'll cost you, so it should be seen as an extreme measure, though this is still more flexible than a pension.
- Take it out early and you'll pay a 25% penalty on the amount withdrawn. This is effectively taking the bonus away, and also making a small charge
- You may be able to 'borrow' from these savings in future. The Treasury is consulting as to whether there should be penalty-free withdrawals if the 'borrowed' funds are fully repaid, but you won't be able to do this when the LISA launches in April 2017.
What happens to the cash if I'm terminally ill, or I die?
It's a horrible circumstance, but there is a provision in the Lifetime ISA rules that allows you to access the cash as a tax-free lump sum if you're terminally ill, provided that you have 12 months or fewer to live.
If you die, and you're married or have a civil partner, your Lifetime ISA allowance passes to him/her to invest your Lifetime ISA savings. This is on top of their usual ISA allowances. However, the funds in the Lifetime ISA do form part of the estate for inheritance tax purposes.
If you're a first-time buyer, the Lifetime ISA is a no-brainer
Like its Help to Buy ISA cousin, this Lifetime ISA is a no-brainer for first-time buyers. The fact that the state adds 25% on top of what you save means nothing else comes close it is, literally, money for nothing.
So, if you plan to be a first-time buyer in future, or frankly even if you've only an inkling you may buy a home, it's worth starting it off. If you don't use it for a home, you've a head-start on saving for retirement, though the sums get more complex compared with pensions.
The Lifetime ISA is an individual product couples can have one each
There's no such thing as a joint LISA: you and your partner/spouse should open separate ones. This is especially important to understand if you plan to buy a home together. To make it plain:
- If you're a first-time buyer making a purchase with someone who's owned before you can still open one and use it towards a home purchase together. They can't (they can only use the LISA for retirement saving).
- If you're both first-time buyers buying a house costing under £450,000 together you can both open one and save in it, effectively doubling the bonus.
You can have a Lifetime ISA and a Help to Buy ISA
The Help to Buy ISA launched in December 2015, and just like the LISA, it has a 25% bonus that's added on top of what you save if you use it towards a first home. It now looks as if it was a test-bed for the Lifetime ISA. So how do the two interact?
- You can have a Help to Buy ISA and a Lifetime ISA.
- However you can only use the bonus from one of them towards buying a house.
- Use the LISA for the 25% bonus to buy a home and you won't get the bonus with the Help to Buy ISA, but you can still keep the money plus the interest (and use it towards buying your home).
- Use the Help to Buy ISA for the 25% bonus and you'd have to pay a penalty to use your LISA savings for a property. Though you would still be able to use it and get the bonus for retirement savings.
- You can save in a Help to Buy ISA now and then transfer it into a Lifetime ISA when they launch in April 2017.
While the LISA allows you to save more, the Help to Buy ISA does still work for some, especially those who are over 40 or under 18. Here's how they compare for buying your first home:
Lifetime ISA Help to Buy ISA How much can you save? £4,000/yr £2,400/yr (£3,400 in year one) Can you put lump sums in? Yes No, need to save monthly What's the max bonus? £32,000 (assumes max contribution over 32 years) £3,000 (assumes max contribution over four years and eight months) When's the bonus paid? Annually in the 2017/18 tax year, then monthly from April 2018 On completion when you buy a home Can you invest as well as save? Yes, with cash & shares LISAs No. Cash only. What's the max property price? £450,000 £250,000 (£450k in London) When can you use it to buy a home? After the LISA's been open 12mths Once you've £1,600+ saved Who can open it? Anyone aged 18 to 39 Any first-time buyer aged 16+ Can I withdraw money if not buying a home? Yes, at age 60+; if earlier you don’t get the bonus and will pay a penalty Yes, at any time, you just don’t get bonus
What if I'm buying a property costing more than £250,000 outside London? Can I open a Help to Buy ISA now, then transfer it to a Lifetime ISA?
Quite simply, yes.
We've heard from a few people who didn't bother opening a Help to Buy ISA as they wouldn't be able to buy a property in their area for under £250,000. But it looks like this provides an answer, as you will be able to transfer Help to Buy ISA savings in to the Lifetime ISA and then get the bonus on both at the end of the 2017/18 tax year.
You can then use the combined savings in the Lifetime ISA towards a home costing up to £450,000 anywhere in the UK.
The only thing to watch out for with this is that you need to have had the Lifetime ISA open for 12 months before you can withdraw funds to put towards a first home - the amount of time you've saved in the Help to Buy ISA doesn't count towards this. So, if you're planning to buy before April 2018, this trick ain't going to work.
Saving for a home? Don't wait for Lifetime ISAs open a Help to Buy ISA now to transfer it in
If you've already saved into a Help to Buy ISA before the Lifetime ISA starts, you'll be allowed to transfer it into the LISA, still getting the bonus, without it having an impact on your allowance...
- Only money put in a Help to Buy ISA before 6 April 2017 can be transferred without impacting the allowance.
- You'll have until 5 April 2018 to transfer it across.
- Money saved in a Help to Buy ISA after 6 April 2017 can be transferred to a LISA, but will use up your allowance for that year.
If you need to buy a home before April 2018, the Help to Buy ISA is the only route available as you need to have had the Lifetime ISA open for 12 months before being able to withdraw it for a property purchase (the length of time you've saved in the Help to Buy ISA doesn't count towards this).
However, some who are saving now to buy a home later have questioned whether it's worth bothering with
@MartinSLewis but better to do a high % regular saver for 12 months then move it to Lifetime ISA depending on how much your saving?— Adam Millicent (@AdamMillicent) March 17, 2016
But once LISAs are available, if you then shift that lump sum into one, you've effectively used up much of your LISA allowance for the 2017/18 tax year. Whereas if you save in a Help to Buy ISA now, then transfer it once the 2017/18 tax year starts, that won't count towards your allowance, allowing you to save more.
So in a nutshell, if you're thinking of getting a home soon, you should open a Help to Buy ISA now. Read Martin's blogs on Help to Buy ISA vs Lifetime ISA and how to max gains by timing it right for more detail.
The money can be put into savings or stocks and shares: the longer you're likely to keep it, the more you should consider share-type investments
Unlike Help to Buy ISAs, which are cash savings only, the Lifetime ISA gives you two savings options:
- A cash LISA: Here you put the money into the equivalent of a savings account. Your capital (the sum you put in) is safe and you get a defined amount of interest on top.
- An investment LISA: Here the money is invested in stocks and shares or shares funds and performance depends on the stock market. So the money you put in is at risk, but if it does well you can make substantially more.
Which you opt for will depend on your attitude to risk and reward, though as a rule of thumb if you're investing, you should be looking to invest for at least five years. This allows enough time to ride out any bumps in the market that might see you make a loss on your money.
So, if you're a first-time buyer looking to buy a home in the next two or three years, it's sensible to opt for cash. You'll know exactly how much you'll have when you come to make the purchase, as interest is guaranteed.
If you've bought your first home already, however, and you've more than five or ten years to go until retirement, the general wisdom is it's worth taking some risk at that point and looking at the higher rewards that investing in the market can bring though it comes with the risk of losing money if stock markets (or companies you hold shares in) tank.
Unlike Help to Buy ISAs, you can have more than one Lifetime ISA, just not open more than one in the same year. So, you could open a cash LISA one year, and a Stocks & Shares LISA the next year. It's even possible providers may develop products which'd allow you to split between cash & shares in the same LISA.
We'll have more details of the choices here once we're closer to launch.
Are my savings safe in a Lifetime ISA?
Lifetime ISAs can be savings accounts or investment accounts.
With savings, the only risk is the slight one of the bank or building society going bust, though you get up to £75,000 protection from the Financial Services Compensation Scheme.
The only thing to watch is that this is by banking institution, not per account. So if you have other savings in the same place as your Lifetime ISA savings, it could take you over the limit. If so see the Savings Safety guide for more info.
If your cash is invested, you have investment risk the value of your funds or shares could go up or down. A totally different Financial Services Compensation Scheme (FSCS) protection applies here...
Investor protection is about providers going bust, NOT you losing money
The FSCS investment protection applies if you lose money due to the product provider of the investment going bust eg, if you've got a stocks and shares ISA with a bank, and the bank goes bust and not if the underlying investment goes bust.
In other words, if you've shares in a company and it goes kaput, or you've bought a fund and it performs poorly, you've no protection as that's the nature of investing.
Yet in many cases if you're buying shares or funds through a company eg, some stockbrokers just sell you shares the fact the stockbroker went bust wouldn't actually matter. You'd still own the shares, so there'd be no compensation.
In general, if you are due compensation, you'd get 100% of the first £50,000 back.
As it's an ISA, the savings interest or investment growth is tax-free
The Lifetime ISA is, well, an ISA an individual savings account which is a place to save where the taxman can't get his hands on the interest you make.
From April 2017 you'll be allowed to put £20,000 in ISAs each year (currently £15,240) and the money you put in your LISA will count towards that. So if you put £4,000 in the LISA you'll only be able to put £16,000 in other ISAs the bonus you get doesn't count towards the year's ISA allowance.
How the tax treatment works depends on whether you're saving or investing...
Cash LISA savings
Interest is paid tax-free on the amount you contribute and any government bonus that's already in the account when the interest's paid. You get to keep all of this interest, and the next year will earn interest on it too known as compound interest.
Also, the interest earned doesn't count towards your personal savings allowance, so there's no impact on your ability to earn £1,000 a year of interest tax-free as a basic-rate taxpayer from other savings (£500 higher rate).
This is more complex as investment gains come in three main types, but here's how the investment LISA's tax shields work...
- Capital gains if investments are within an ISA, you don't pay capital gains tax.
- Dividends there's no tax to pay in an ISA.
- Bond interest if you hold bonds within your ISA, you won't pay tax on the interest.
How does the Lifetime ISA compare with a pension?
The Lifetime ISA is designed as a way to save for retirement, just like a pension. Some will see it as an alternative; others will see it as a complementary measure, as you can have both. But the two are very different beasts.
- With a pension you save from gross (pre-tax) income. So, as a basic-rate taxpayer, to save £100 only costs you £80 from your pay packet, as that's all you would've received.
- With a LISA you save from net (after-tax) income. So, to put £80 in costs you £80. However, if 25% is added to it, that means you've got £100.
So on the surface the amount you put in and get are pretty similar for basic-rate taxpayers. However it does get more complex than that...
Where a pension beats a Lifetime ISA
- If you're employed, auto-enrolment means your employer has to match some of your contributions in a pension; they don't in a LISA. This is a big advantage of pensions, and one that easily trumps a LISA.
- You may also get national insurance and salary sacrifice gains from pension saving through an employer that you wouldn't get with a LISA.
- Higher-rate taxpayers get relief at 40% in a pension. So to contribute £100 only costs them £60 easily beating a LISA.
- Saving in a pension doesn't impact your benefit entitlement saving in a LISA can. See LISAs and benefits.
- You can take money from your pension aged 55+; you need to be 60 to use LISA savings without penalty.
Where a Lifetime ISA beats a pension
- When you take your pension (see the how to take your pension guide) you can only take 25% of it as a tax-free lump sum the rest you pay income tax on. However you can withdraw totally tax free from a LISA. There are some who worry that this makes the LISA dangerous as the tax on pension withdrawals means people don't take it out all at once in case it pushes them up a tax band and that barrier has gone with LISAs.
- The LISA is more flexible as you do have the option to use the cash that you're saving towards your home towards retirement too.
- Apart from with critical illness and death you can't ever take cash out of a pension early, but if you're prepared to pay a penalty you can withdraw from a LISA.
As this is complex, we've put it in a table as well, to make it easier to understand...
Lifetime ISA Pension basic-rate taxpayer Pension higher-rate taxpayer Employer contribution None Yes 1-3% of salary (see autoenrolment) Yes 1-3% of salary (see autoenrolment) Government contribution 25% 25% (tax relief) 66% (tax relief) Max amount you can you save/yr? £4,000 £40,000 (max amount with tax relief) (1) £40,000 (max amount with tax relief) (1) When is bonus/tax relief paid? Annually in the 2017/18 tax year, then monthly from April 2018 Immediately Immediately Who can open one? Anyone aged 18-39 Anyone aged 16+; parent can open one for you from birth Anyone aged 16+; parent can open one for you from birth When can you access it? Age 60 (accessible before for a penalty) Age 55 Age 55 Tax treatment on pay-in From post-tax income From pre-tax income From pre-tax income Tax treatment on withdrawal Tax-free 25% tax-free, rest taxed at your income tax rate 25% tax-free, rest taxed at your income tax rate Liable for inheritance tax? Yes No No Affects pre-pension age benefits entitlement? Yes No No Can be taken to pay creditors in bankruptcy? Yes No No
(1) You can carry unused allowances over from previous years, meaning that technically you could contribute up to £170,000 in the 2016/17 tax year. However, you'd need to earn at least this to get this much tax relief. For a fuller explanation of the annual allowance, see 17 pension need to knows.
OK, so you've had all the information. But what you really want to know is which to use for retirement saving. There is no firm answer, but in general if you're employed, you should pay in to your employer's pension scheme, as your employer has to also pay in which is effectively free cash.
If you're self-employed and a higher-rate taxpayer, still prioritise paying in to your pension as the tax relief is far bigger. If you're self-employed and a basic rate taxpayer, the differences are much smaller, so it may be more about which scheme will suit you better taking into account the differences in the table above.
A little aside...
Not to do with your choice, but it's worth taking a look at the real cleverness behind this from the Treasury. If people use a LISA rather than a pension, as it comes from taxed income it gets the Treasury tax revenue now. If people put it in a pension, the Treasury has to wait years until it gets tax. So, this could be Mr Hammond cleverly grabbing cash out of future Chancellors' pockets.
Once it's opened, don't think you're locked in you're free to transfer it to another provider
Once you've got the Lifetime ISA open you don't have to stick with the provider you pick at the start.
As with normal ISAs, interest rates will go up and down you'll need to keep an eye on it, and be ready to transfer between different Lifetime ISA providers to up the rate if you see a better deal.
The same is true with investment ISAs: you may decide to change your investment priorities, in which case you'll be allowed to move it.
You can hold more than one Lifetime ISA at any one time, provided that you only pay in to one at any time in each tax year (you can transfer the current year's money around, provided it's ALL transferred each time).
Can I pay in to a Lifetime ISA and other ISAs in the same tax year?
Yes you can, provided between them you don't pay in more than £20,000 (the 2017/18 tax-year ISA limit, which could rise in future).
You'll be able to hold and pay in to a LISA, cash ISA, stocks and shares ISA and Innovative Finance ISA (for peer-to-peer investing) in the same tax year. Some may also be able to pay in to a Help to Buy ISA too, but see above for how the two interact.
Can I transfer cash from other ISAs into my Lifetime ISA?
Yes, but you can only transfer £4,000 from other ISAs into the Lifetime ISA in any one tax year (excepting the 2017/18 tax year when there's a special exemption to allow you to transfer any savings in your Help to Buy ISA to the Lifetime ISA too).
As with any ISA transfer, anything you've transferred from previous years' ISAs does not affect your current tax year's contribution.
So, if you transferred £4,000 into the Lifetime ISA from a previous year's ISA in the 2017/18 tax year, you'd still be able to deposit £20,000 into a cash ISA, stocks and shares ISA or an Innovative Finance ISA (or a split between two or three of these) within the same tax year, though you'd have used up your Lifetime ISA allowance for that year.
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For updates on the Lifetime ISA, join the 11m who get the weekly email.
Martin Lewis Lifetime ISA briefing; MSEs founder answers your questions
Within one day of the announcement of this new LISA in the Budget 2016, we were swamped with questions from first-time buyers and under-40s looking at their retirement options. So here's Martin Lewis with a three-minute video briefing, recorded on 17 March 2016, followed by a LISA Q&A.