The new Lifetime ISA

The new Lifetime ISA

The Lifetime ISA was introduced by the Chancellor in the March 2016 budget. It is primarily intended to help first-time home buyers get a foot-hold on the property ladder and people save or invest for retirement.

What is the Lifetime ISA?

The Lifetime ISA is available exclusively to UK residents aged 18 - 40, however account holders will be able to continue to pay into their account past the age of 40 as they like.

You can save or invest up to £4,000 a year in a Lifetime ISA. At the end of each tax year, the government will add a 25% bonus on your contributions paid in for that tax year. This bonus will be paid until you're 50.

This means someone paying in the maximum premium of £4,000 per year could make up to a total of £32,000 in bonuses alone before any interest (for a cash element) or returns (for an investment element) are realised if they receive the full amount of government bonuses. In effect, this is an ISA account with a starting 25% interest/returns rate.

You are only allowed to withdraw your money before the age of 60 to buy your first home (up to the value of £450,000). Any withdrawals by those under 60 not for a first time home will lose the government bonuses plus interest or growth (from the bonus money) - and a 5% penalty will also be imposed.

As with regular Cash, Investment and Innovative Finance ISAs, you are only entitled to save or invest in one Lifetime ISA per year, however, you can hold accounts with different ISA providers in other years.

The Help to Buy ISA will end in November 2019. Holders of these accounts will be able to transfer their money out to a Lifetime ISA from 2017.

How does it differ from a pension?

All of your money can be withdrawn tax-free after you turn 60, in contrast to a pension which only allows you to withdraw 25% of your pot tax-free.

Tax-free means the fund your plan invests in grows free of income and capital gains tax (other than tax on dividends from UK shares), or any interest earned on savings is free from tax. Tax treatment depends on your individual circumstances and tax law may change in the future.

Also unlike a pension, there are no employer contributions.

Who could benefit from the Lifetime ISA?

UK residents aged 18 to 40 can apply. So, for example ,young house-buyers could see their house buying prospects given a boost, self employed people with no personal pension will find it particularly attractive, and parents or grandparents wishing to gift their children money later in life could find it useful.

What could the downsides be?

There is a risk that the new accounts may discourage savers or investors paying into a workplace pension scheme, and therefore potentially missing out on employer contributions. It has also been noted that there is a risk to house prices being artificially inflated. And if you already own a home, it will be somewhat less relevant.

As with all investments, the value could go down as well as up and you could get back less than you pay in. In times of low interest rates, the return on cash savings can be eroded by the effects of inflation.

Lifetime ISAs will be available from April 2017.

Our ISA products

Your ISA allowance?

Check out our range of Investment ISAs.

Scottish Friendly Investment ISAs

Unfortunately we don’t offer advice at Scottish Friendly, so if you are in any doubt as to whether a plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting Advisers may charge for providing such advice and should confirm any cost beforehand.