Lifetime ISAs offer 25% bonus on savings to give you a step up onto the property ladder
When it comes to saving for a deposit on your first home, it can seem like the goalposts are constantly moving.
Just as you come close to your savings target, house prices rise again and you need an even more substantial deposit to get onto the first rung of the property ladder.
The same can be said about pensions. It is difficult to predict what the cost of living will be when you retire, especially for younger workers, so how do you ensure you are saving enough to provide for your later years?
In April the lifetime ISA was introduced to encourage savers aged 18 to 39 to set funds aside for these two life milestones.
As an incentive, the Government is offering not only tax-free saving but also a 25% bonus on all deposits.
Our team of chartered accountants and chartered tax advisers here at Jacobs Allen are able to offer advice on how these tax-free savings plans work.
The Lifetime ISA enables those aged 18 to 50 to save up to £4,000 a year, provided the ISA is opened by the time you are 39. This means those who start contributing as soon as they are eligible can save a maximum of £128,000 tax-free.
And each year the Government will offer a 25% bonus on all deposits, meaning your savings could be bolstered by £1,000 a year or £32,000 by the time you reach your 50th birthday
You can still use your remaining tax-free savings allowance – set at a total of £20,000 for this financial year – to fund other types of ISAs.
To fully take advantage of this type of account you should only withdraw funds either for the purchase of your first home or after you’ve reached your 60th birthday.
Withdrawing funds at any other time means you will forfeit the Government’s contributions – the only exception to this is if you are terminally ill.
You can transfer your Lifetime ISA to a different bank or building society without incurring a charge but transferring the funds to any other type of ISA will mean you sacrifice the Government contributions. If you move money from existing cash ISA to a Lifetime ISA, the funds are eligible for the 25% top-up.
This bonus makes the Lifetime ISA sound appealing in comparison to traditional pension schemes if you plan to use it for buying your first home or as a lump sum after you are 60. However, your tax-free allowance for pension contributions is much higher at £40,000 per annum, plus employers can pay additional contributions and under Auto-enrolment, have to pay a percentage of your salary on top.
You will be charged tax on your pension payments when you come to draw them, although you will have the option of taking a tax-free lump sum of up to 25%.
If you prefer to save for retirement in a more traditional way, you could use your Lifetime ISA for a house purchase provided you meet several strict criteria.
- The property you are buying cannot be valued at more than £450,000
- You must be taking out a mortgage on it
- It must be for your own residential purposes and not, for instance, be a buy-to-let property
- You cannot own any other residential properties here or abroad
- Purchases must also be made through a solicitor or conveyancer as the Lifetime ISA savings need to be transferred directly to them
- You cannot withdraw funds to buy a property in the first 12 months
For those who have been saving using the existing Help to Buy ISA, you can now transfer the funds to a Lifetime ISA. You can continue paying into your existing Help to Buy ISA and new accounts can, for now, still be opened but the limit on the amount you can contribute is just £2,400 a year and you can only purchase a house up to a maximum cost of £250,000 unless you are buying a property in London in which case the limit is extended to £450,000.
With the older scheme, the Government offered a 25% contribution, up to a maximum of £3,000, on deposits and interests when you buy a property rather than on an annual basis.
While you can currently open both types of ISA simultaneously, you will only be eligible for the bonus payments on one.
There are advantages – there is no age restriction on a Help to Buy ISA provided you are over 16 and unlike the Lifetime ISA you can withdraw funds as soon as you have saved a minimum of £1,600.
For more tailored advice on tax efficient savings, contact our team in our offices either in Bury St Edmunds on 01284 704260 or in Haverhill on 01440 707184.