What was announced in the Budget?
The Lifetime ISA (LISA)
Introduced from 6th April 2017 to help people, aged between 18 and 39 (at 6/04/17), to save flexibly for the long term and ensure they do not have to choose between saving for retirement and saving for their first home.
What does this mean?
On the way in:
- Contributions made from post-tax income
- Contributions of up to £4,000 per tax year will to receive the 25% bonus up to the point an individual reaches age 50 – £1,000 Government bonus for the max annual contribution of £4,000
- Sits within the overall ISA contribution limit of £20,000 per tax year
- The 25% bonus is equivalent to basic rate tax relief on contributions up to the annual LISA limit
- Contributions from age 50 will not receive any Government bonus
- During 2017/18 tax year only – transfers from funds built up in a Help to Buy ISA before the introduction of the LISA (6/04/2017) will receive the Government bonus and will not count towards the annual LISA contribution limit. Thereafter transfers from Help to Buy ISAs will count against the annual LISA contribution limit. Help to Buy only available to 30 Nov 2019 and open to contributions up to 2029.
While it’s in the fund:
- Free of Income tax and Capital Gains Tax
- Same investment options as regular ISA, cash and investment
- Possible flexibility to borrow funds against the Lifetime ISA without incurring a charge if the borrowed funds are fully repaid (the Chancellor referenced the fact that some US retirement plans allow borrowing of up to 50% of the fund value, with an overarching limit of $50,000)
On the way out:
- Funds can be withdrawn tax free if they are used to buy a first home, up to the value of £450,000, with the government bonus, at any time from 12 months after opening the LISA account, or
- Withdrawals can be made tax free from age 60, with the Government bonus, for use in retirement
- Withdrawals at any time for other purposes will be subject to return of the bonus element of the fund (including any interest or growth on that bonus) to the government, and a 5% charge applied. So, individuals will have access to their savings and any interest earned on those savings minus the 5% charge.
- On diagnosis of terminal ill-health (using current pension definition) full withdrawal (including bonus) can be made tax free, regardless of age.
- The government will consider including other ‘life events’ that may allow access to funds
- First time house purchase
- Use in conjunction with traditional pension- funding both to age 50, then stop Lifetime ISA funding (given no further bonuses) to provide flexible (and tax efficient) retirement funding
- Use to fund income gap between age 60 and full retirement, allowing phased retirement/part-time working, in a tax efficient manner.
- Those that are finding the Annual Allowance (AA) or Tapered Annual Allowance limiting, can continuing retirement funding via a LISA (albeit at a bonus rate equivalent to basic rate tax relief, but this is clearly better than no bonus)
- Those who are non-working can, in addition to the £3,600 annual contributions into pension, fund a further £4,000 per tax year into a LISA giving further potential for savings
- Attractive to the parents and/or grandparents of young adults wishing to help with two of the major costs of life.
Basic rate taxpayers might be better investing in a LISA than a traditional pension, but higher rate taxpayers who will be basic rate tax-payers should continue using traditional pensions.
However, this needs to be heavily caveated, obviously without the full details of the proposals and the possible changes the Chancellor may have planned for traditional pensions (in particular the tax relief on pensions) it’s difficult to draw a conclusive conclusion.
But we need to be very mindful of a couple of issues:
- Using funds to fund house purchase will obviously have an impact on the funds left for retirement
- The limits on LISA contributions means that LISA on its own is unlikely to provide sufficient retirement funds and as such traditional pension provision would appear to still have a place at all levels
- Apart from first time house purchase LISAs can only be drawn (while retaining the bonus) at age 60, whereas pensions are fully accessible from age 55
- Contributions to LISA from age 50 do not attract any Government bonus, whereas pensions continue to enjoy tax relief on contributions throughout the full contribution period
- Pension funds are protected from IHT, LISA may not be
- The pension arrangement available to a client may enjoy an employer contribution which will obviously boost the fund at retirement and has not been factored into above
- What impact will LISA have on the Government flagship auto-enrolment- opting out in favour of a LISA would lose the employer contribution, which could have a massive impact on the final funds available at retirement.
LISA clearly has the potential to augment traditional pensions rather than be a replacement. Running a LISA alongside a pension makes sense but the weighting of the contributions will be largely dependent on other factors and needs to be assessed on an individual client basis. However, the availability of additional tax efficient methods of saving can be nothing but positive.
Further details to follow after the Government have consulted with the savings profession – legislation to follow in autumn.
Will the final legislation, post European vote, be more expansive and inclusive?