In the March Budget of this year George Osbourne announced the launch of a new savings account for people aged 18-40 to put towards buying their first house or their pension, the Lifetime ISA. The Treasury stated 'You can use some or all of the money to buy your first home, or keep it until you're 60 – it's up to you'. The benefits of the ISA seem too good to pass however some banks are boycotting the ISA which brings to light some possible issues.
To sign up to a Lifetime ISA you must be between the ages of 18-40 and it can only be used for buying your first property or saving for your pension. Each year a maximum of £4000 can be put into the ISA and a 25% bonus will be added at the end of each tax year. This could mean a possible bonus of £1000 a year. From 2018/19 the bonus will be paid monthly.
This has created a rival for the help to buy ISA (HTB) however there are differences which means that the Lifetime ISA is more attractive to savers. The maximum price of the property with a Lifetime ISA is £450,000 in comparison to the HTB being £250,000 outside of London. There is also an increase in the amount that can be paid in as the HTB only allows payments up to £200 a month. The only limit of the Lifetime ISA (LISA), as mentioned above, is that you can pay up to £4000 a year, through a lump sum or instalments during the financial year. The LISA can be used for the deposit on the property whereas the HTB bonus is not added until completion, causing confusion for first time buyers. Therefore the LISA appears to be a better way for first time buyers to save for the deposit.
The LISA is also provided as a savings account to be withdrawn at retirement age although the workplace pension is still believed to be the better option for employees and the government urges caution in this respect. The main reason for this is that employers do not contribute to the LISA which they do for a workplace pension. However there is a benefit to the LISA, when the LISA is withdrawn, from the age of 60, all proceeds are tax-free whereas the workplace pension is only 25% tax free. Despite this, many have argued that adding the LISA as an alternative to a pension will just create further confusion which is why Nationwide has decided to boycott the LISA.
When considering to open up a Lifetime ISA there are further issues to be considered. Feedback from banks and pension providers is that not enough information and direction has been given by the government surrounding the new scheme and some doubt that they will be able to have the ISA ready for April 2017. The most worrying issue is the heavy penalty that is charged if you decide to withdraw money early. Not only will the 25% bonus be taken away there is also a 5% charge on withdrawal.
Therefore whilst the Lifetime ISA has strong benefits for first time buyers, individuals should be cautious when looking at it as an alternative to a pension.
The Lifetime ISA is due to become available in April 2017, Clapham & Collinge Solicitors can assist you, your friends or family in purchasing your first home with a help to buy ISA or the new Lifetime ISA and in planning your future finances with an Lasting Powers of Attorney (LPA) or Will. Contact us today on 01603 693500 or email us using the 'make an enquiry' form. Appointments available at our Norwich, Brooke, North Walsham and Sheringham offices.