Save For Your House with the New Lifetime ISA
Launched by George Osbourne in the March 2016 budget, the new lifetime ISA looks like a fantastic way for people aged between 18 and 40 to save up for a deposit for their first property and also for their future.
The new lifetime ISA is a hybrid of a personal pension and the current ISA rules with a little help-to-buy ISA thrown in for good measure.
When you make a personal pension contribution you receive a tax credit to top up the saving. In 2017 the new lifetime ISA will give you a fantastic 25% bonus on your ISA deposits up to a maximum bonus of £1000 per year. The money can then be invested within the ISA as per usual in cash, stocks or shares.
Unlike a pension though, which would lock your money up until a minimum age of 55, you can withdraw the funds from a lifetime ISA for a property purchase after just one year.
You have to pay tax on pension withdrawals but lifetime ISA funds are completely free from income and capital gains tax for a first property purchase or after the age of 60.
Withdrawals for purposes other than a first property purchase before the age of 60 will incur a 5% tax.
This article is based on the provisional information and may be subject to change.
How Does the Money Grow?
If you save the maximum allowed of £4000 per year (£333.33 per month) and we assume you invest the money with a return of 4% per year net of all fees over 5 years:
First year = Starting balance £0 + £4000 in deposits + £1000 in bonus + £200 interest = £5200
Second year = Starting balance £5200 + £4000 in deposits + £1000 in bonus + £408 interest = £10608
Third year = Starting balance £10608 + £4000 in deposits + £1000 in bonus + £624 interest = £16232
Forth year = Starting balance £16232 + £4000 in deposits + £1000 in bonus + £849 interest = £22081
Fifth year = Starting balance £22081 + £4000 in deposits + £1000 in bonus + £1083 interest = £28164
You will have paid £20000 in but could receive £28164 back towards your first home with annual 4% growth.
Even without growth you would still have an additional £5000 in annual bonuses.
(Stock markets rise and fall. Your money may be at risk in certain investments and with them, you can get less back than you put in. Always take independent financial advice to understand the risks).
A couple saving together can deposit in each name and save up to £8000 per year and receive up to £2000 every year in bonuses from the government. That’s up to £10,000 extra over 5 years! Tax free and no strings attached.
When Do I Get the Bonus?
The 25% bonus will be added to the deposits at the end of each tax year for people aged between 18 and 50.
If you open a lifetime ISA on your 18th birthday you will receive a maximum £32,000 in bonuses by the time you are 50 (Assuming you save the maximum of £4000 per year and the rules do not change).
Can I Pay In More Than £4000 Per Year.
This has not yet been clarified. It is expected that you may be able to but the bonus will be limited to the first £4000.
I Already Have a Help-To-Buy ISA
Good News! You will be able to transfer the funds in to the new lifetime ISA and receive the new benefits if you prefer. You can also use the help-to-buy ISA for a house purchase and a lifetime ISA for retirement savings but, as I understand the new rules, you cannot use both towards a house purchase.
So Are They Any Good?
There are many things to consider when saving and the best way may depend on your individual circumstances. Savings may affect your entitlement to certain benefits and if you have other ISA savings we must ensure you do not breach any limits.
The lifetime ISA certainly looks like a good scheme to help younger people on to the property ladder and to also encourage many more people to save to compliment their pension.
The full details will be confirmed throughout this year and I can advise if they will be suitable for you.
Contact me to find out more.