The Lifetime ISA was announced by the Chancellor in the March 2016 budget and launched on the 6th April 2017.
It's primarily intended to help first-time homebuyers get a foothold on the property ladder and people save or invest for retirement.
What is the Lifetime ISA?
The Lifetime ISA launched on the 6th April 2017 and there are several changes to the normal ISA rules you should be aware of through a Lifetime ISA. We’ve explained the main ones below.
What are the Lifetime ISA age limits?
UK residents aged 18 to 39 can open a Lifetime ISA, however you will be able to continue to pay into your account until your 50th birthday if you like.
How much can you save or invest in a Lifetime ISA?
You can save or invest up to £4,000 a year in a Lifetime ISA. This forms part of your overall ISA allowance of £20,000 for the 2018/2019 tax year.
How much will the government add to a Lifetime ISA?
Each tax year, the government will add a 25% bonus on your contributions paid in to your Lifetime ISA and this bonus will be paid until your 50th birthday.
If you are paying in the maximum of £4,000 each 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 you receive the full amount of government bonuses. In effect, this is an ISA account with a starting 25% interest/returns rate.
Keep in mind, the value of investments could go down as well as up and you could get back less than you pay in. In times of low interest rates, the effects of inflation can erode the return on cash savings.
When can I access my money in a Lifetime ISA?
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). In order to use the money for a house purchase your Lifetime ISA is required to be open for a full year.
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.
How many Lifetime ISAs can I have?
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. After this date it won't be available to new savers anymore, but if you opened your account before 30 November 2019 you can keep saving into it until 30 November 2029 when accounts will close to additional contributions. 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 isn't the option of employer contributions.
Who could benefit from the Lifetime ISA?
UK residents aged 18 to 39 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 effects of inflation can erode the return on cash savings.
Scottish Friendly doesn't provide advice. The information provided should help you decide if an ISA is suitable for you. If you're not sure whether an ISA is suitable, you should contact an independent financial adviser for advice. Advisers may charge for providing such advice and should confirm any cost beforehand.
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