Could LISA be your friend?
7th April 2017
Posted in Articles, Featured Articles, Private Client by Forbes Dawson
A new type of ISA, the ‘Lifetime ISA’ became available on 6 April 2017, allowing savers to save up to £4,000 per year whilst attracting a bonus of 25% at the end of each tax year. This LISA is available to those aged between 18 and 50 (although you must be under 40 to apply), meaning that a saver can receive up to £32,000 of free cash from the government in a lifetime.
The LISA has been created with two main objectives in mind:
- For first-time buyers to purchase a UK residential property; and
- To save for retirement
Advantages of the LISA
Unlike the already available Help-to-Buy ISA, an investment LISA is available which would provide greater opportunity for growth over the long-term by having the ability to invest in stocks and shares (although of course there is also greater risk of losses).
If two people are purchasing a property together, they can benefit from a LISA each which means up to £2,000 free cash from the government each year.
Like a normal ISA the LISA can be drawn down completely tax free. You can choose to withdraw small amounts or draw it all at once and there would be no tax consequences either way. This flexibility may encourage investment by those not typically interested in pensions.
Disadvantages of the LISA
You need to be UK resident to benefit from the LISA and you must also be under 40 years old to apply. There are also strict rules if using the LISA to acquire a property, such as the fact that it will need to be partly funded by a mortgage, therefore this will not be appropriate where parents are helping children to get on the property ladder. Also it can only be used to acquire a property that will be lived in by the purchaser; no buy-to-lets. Also the value of the property must be under £450,000 so this may not be of great use to London residents.
Also the bonuses will be withdrawn if you draw down from the fund before aged 60 (where it is being used as a pension rather than to fund property).
As with all ISAs, whilst they are favourable for income tax and capital gains tax they remain part of the holder’s estate for inheritance tax purposes, unlike a pension.
Take home message
The LISA is ideal for people looking to purchase their first property. However, as only £4,000 can be saved in per year, the LISA should be considered alongside other ISAs and investment products (bearing in mind that from 2017/18 the ISA limit will be £20,000).
The bonus is only paid where the LISA has been open for a year, so consideration should be given to paying £1 in as soon as possible in order that the bonus can be paid on any later larger contribution.
Consideration will be need to be given in each circumstance as to whether a LISA will outweigh the benefits of a traditional pension. Certainly for those higher rate taxpayers, contributing to a pension offers greater tax savings. Also a LISA will not be protected in divorce and bankruptcy proceedings, unlike a pension and therefore early encashment could be enforced with related loss of bonuses
