The ISA has long been an incredibly attractive way for UK investors to shield their investment income and capital gains from all taxes.
The annual contribution limit has risen over the years, too. From 6 April 2017 you’ve been able to sock away £20,000 a year.
Some or all of that allowance can now go into an Innovative Finance ISA. Similar to a cash ISA, this enables you to shelter the higher income you can get from peer-to-peer platforms from tax (although big boys Ratesetter and Zopa have yet to win approval for theirs).
The ISA has also become a weapon of redistribution, albeit one with a distinctly Tory slant.
First came the Help to Buy ISA, which tops-up the savings of first-time buyers. Help to Buy ISAs became available in late 2015.
And then 6 April 2017 saw the launch of the Lifetime ISA – also known as a ‘Lisa’.
The Lifetime ISA / Lisa enables young (and young-ish) people to save up to £4,000 every year into a special new ISA wrapper. This money is then boosted by the Government by 25%.
- For example save the maximum £4,000 and they’ll give you £1,000. That would mean £5,000 went into your Lifetime ISA that year.
The money in your Lifetime ISA grows tax-free, as with normal ISAs. It can later be used to buy your first home or else be put towards retirement.
Here it is illustrated in one official government graphic:
This graphic is actually a bit misleading. It implies the bonus is static, whereas the Treasury’s own documents make clear the bonus becomes part of your total Lifetime ISA pot that compounds over the years. Also, from April 2018 the bonus will be added monthly.
Anyway, free money growing safe from taxes sounds great, right?
Well, it might be, but complications abound with the deceptively simple Lifetime ISA and there are harsh penalties if you stray off-piste.
In this article we’ll dive into the detail of the Lifetime ISA. In the follow-up I’ll look at who should make the Lifetime ISA a big part of their savings strategy, and who should probably not.
(Spoiler alert: I think everyone who can open a Lisa should do so, but in many cases with just the minimum contribution allowed. For example Hargreaves Lansdown will let you open one with just £100. This way you have it should your circumstances change, even after you’re too old to be allowed to open a new one).
The Lifetime ISA explained
Let’s run through the key points.
Opening a Lifetime ISA:
- You must be aged between 18 and 39.
- You must be a UK resident.1
- You can only open one Lifetime ISA per person, per tax year.2
You can open a Lisa if you’re just one day shy of your 40th birthday (and as mentioned I think you should).
After that, computer says no.
How much can you put in?
- You can save up to £4,000 a year into your Lifetime ISA(s).
- Any cash you put in it before your 50th birthday will receive an added 25% bonus from the government.
- The first government bonuses will be paid into your Lifetime ISA account in April 2018.
- From then on bonuses will be paid monthly.
- Once in your Lisa, the bonus earns interest (or can be invested) just like the money you contribute yourself. This nicely increases the total pot you’re compounding.
- For the 2017-18 tax year only, you can transfer savings you’ve built up in a Help to Buy: ISA into a Lifetime ISA in that year and still save up to £4,000 into your Lifetime ISA and get the government bonus.3 See MoneySavingExpert for some ideas on timing.
- You can save into a Lisa until the day before your 50th birthday. After that it can remain invested, but you can’t put new money in (and you’ll get no more bonuses).
The showstopper attraction then is you get an added £1 for every £4 you put into the Lifetime ISA per year, up to the £4,000 limit.
That’s much better than with a normal ISA, where you pay in taxed money and get no extra top-ups.
Indeed it’s free money – always the safest return.4 For the youngest Lifetime ISA savers, it could add up to tens of thousands of pounds of bonus payments over the decades (presuming the scheme survives.)
If you begin at age 18 and you save the full £4,000 a year, then at 50 you’d have saved £128,000 and enjoyed £32,000 of top-ups. (And that’s just the money that’s gone in, before any growth…)
There are no minimum or maximum monthly contributions to the Lifetime ISA. You should be able to save whatever you want each month, up to the £4,000 a year limit.
What about my other ISAs?
The larger £20,000 annual ISA limit applies across all your ISAs – Lifetime ISA, Help to Buy ISA, Innovative ISAs, and, um, Bog Standard ISAs.
For example, if you put the full £4,000 in a Lifetime ISA, you have £16,000 of your allowance leftover for the rest of the ISA gang that year.
How can I invest my Lifetime ISA money?
Qualifying investments for a Lifetime ISA are the same as for a normal ISA. Cash, shares, bonds, investment trusts, ETFs, funds – all should be fair game.
This means that unlike with a Help to Buy ISA (which is limited to cash) as a Lifetime ISA owner you can take your government-sourced money and pump prudently invest it into shares.
However there’s a snag. In theory, all those assets I listed can be held in a Lifetime ISA – but currently there are no cash Lifetime ISAs available.
This is a pretty strange state of affairs, and it won’t last if the Lifetime ISA survives.
In the meantime, if you are risk averse (perhaps because you think you’ll need the money in a few years for a house and you don’t want to risk the ups and downs of the stock market) you could perhaps open a Lifetime ISA that’s meant for shares, and invest your money and the bonus in a short-term bond ETF.
Or you could just wait for cash Lisas to become available.
How you can use your Lifetime ISA
At last the good bit! You can use the money in your Lifetime ISA in two different ways:
To buy your first home
- Your savings and interest and the government bonus – all compounded together over the years – can be put towards a deposit on your first home. This property can cost up to £450,000, anywhere in the country.5
- If you’re in a couple you can both receive the Lifetime ISA bonuses before buying together, as ISAs and top-ups are limited per person rather than per home. The maximum house price remains £450,000 for a couple, though.
- If you have a Help to Buy ISA you can transfer those savings into your Lifetime ISA in 2017-18, or else continue with both. However you will only be able to use the bonus from ONE of these two kinds of special ISAs to buy a house, which could lead to fiddly complications or decisions down the line.
This last point begs the question of what else to do with your Lifetime ISA money if you don’t buy a house?
Aha! That brings us to the second permitted use…
Put it towards your retirement / later fund
- After your 60th birthday you can take out any or all the savings in your Lifetime ISA, tax-free.
The official line is you will be able to leave the money invested if you want to after you’re 60. You should also be able to transfer your money to another type of ISA.
For example, perhaps Innovative Finance ISAs will be providing would-be retirees with a steady tax-free income and various safeguards in two decades time?
Frankly, who knows what the landscape will look like in 20 years. (Just one reason why constant government tinkering is unhelpful. It adds more uncertainty.)
Assuming the ISA regime survives until 2037 and beyond, I expect that when the first Lisa owners hit 60 there will be lots of options.
What if I don’t buy a house and I want the money before I’m 60?
Now we come to the big sting in the tail – the potential penalty charges.
You can withdraw your Lisa money without a charge if:
- It’s to go towards your first home costing up to £450,000, and it’s been 12 months since you first started saving into the Lifetime ISA.
- Or you’re over 60.
- Or you’re terminally ill.
Otherwise, you face a penalty.
- You will have to pay a withdrawal charge of 25% if you take out money at any time before you turn 60 (unless it’s to buy a qualifying house).
This charge is tougher than you might first think.
Some will see a 25% charge as simply clawing back the 25% Government bonus.
But this is not right. Here’s the maths:
Put in £4,000
Get £1,000 bonus (that is, a 25% boost).
You now have £5,000
Withdraw early, for non-permitted reasons
Take a 25% charge = 25% of £5,000 = £1,250
£5,000 – £1,250
= £3,750
You are left with less money than you put in! (6.25% less to be precise, which is the true penalty for withdrawing after taking into account the bonus).
This is a simplified example. There’s a 30-day cooling off period when you open a Lisa, and there will be no exit penalties charged in this first year. Over sensible time periods there’d hopefully be some growth in your money.
But the principle holds. You might find you have to withdraw money early – and the freedom to do so, even with a charge, is attractively flexible compared to a locked-up pension – but you really don’t want to if you can help it.
If you start a Lifetime ISA, you need to be as confident as possible that you will abide by the rules: Buy a first home with the money, or no withdrawals until 60.
Where can I get a Lifetime ISA?
Only a few providers are offering them so far. Right now Hargreaves Lansdown, Nutmeg, and The Share Centre. That’s your lot.
Seems odd, doesn’t it? Former chancellor George Osborne announced the Lifetime ISA back in the 2016 Budget. Plenty of time for platforms to get on-board – especially when they can dangle carrots of free cash from the government in front of savers.
Theories for the tardiness abound:
- Perhaps the new HMRC reporting regime for Lifetime ISAs is proving onerous?
- There are concerns over those exit penalties (belatedly softened for the first year).
- The first lump sum top-up from the government won’t be paid until the end of the year, so what’s the rush?
- Some fear the Lisa could be the next mis-selling scandal.
Then there’s my theory, which is that the Lifetime ISA is such a muddle that firms presumed it would be scrapped before launch. (A tad naive when it comes to finance, perhaps. When has confusion ever stayed the industry’s hand?)
Don’t get me wrong. The Lisa has its attractions. The initial pros and cons aren’t going to be hard for a typical Monevator reader to figure out.
However extrapolating them over an uncertain 10-30 year time horizon is harder.
Meanwhile the average young person is likely to be bamboozled from the outset.
Should you open a Lifetime ISA?
At first glance, the Lifetime ISA sounds like a Help to Buy ISA with a personality disorder, but that doesn’t mean it’s not worthy of close attention.
As it can only opened by those aged 18-to-under-40, it seems to be aimed at helping the finances (and winning the votes) of a younger generation that has seen job security, affordable housing, and generous final salary pensions disappear over the horizon.
Whether the Lifetime ISA is the best way to address wealth inequality across the generations is a topic for another day.
But if you’re young enough to qualify and you have money that you’re committed to locking away either to buy a home or for your retirement, you should give serious thought to opening a Lifetime ISA.
As I say I would definitely open one if I were under 40, even if it was only to put £100 into it. Once it’s opened, you have the option of using it once you’re over 40, and who knows how your circumstances might change? Don’t open it, and the door closes on your 40th birthday.
All that said, weighing up whether you should be directing money towards a pension (particularly a workplace pension with super valuable employer contributions), a Lifetime ISA, a Help to Buy ISA, a normal ISA, or some other form of savings will be complicated for many people.
Not least because the two uses permitted – buying a home when young, and saving for when you’re old – entail very different investing decisions.
And also because of that exit penalty, of course.
In the next post we’ll see exactly who the Lifetime ISA might be good for, and who should say “no thanks”, and back away slowly.
Note: I’ve updated this post with all the latest on the Lifetime ISA. Older comments below this post may date back to its launch. Many are still relevant, but keep that in mind.
- Or a member of the armed forces serving overseas, or their spouse or civil partner [↩]
- Each time you apply for a new Lifetime ISA you’ll need to meet those first two criteria. After your 40th birthday, no more new Lifetime ISAs for you! However you can continue to contribute to your existing ones until you’re 50. [↩]
- Alternatively you can keep saving into both schemes. However note you will only be able to use the bonus from one of the ISA types to buy a house! [↩]
- Okay, it’s not totally free as the government must get the money to top-up from somewhere, via taxes. But if you’re young it will probably be coming from taxing someone older. [↩]
- Unlike the Help to Buy ISA, which has different limits inside and outside of London. [↩]
“accounts will be available from April 2017”
Doh! I will be 40 and one month…
well we have a year to figure this all out.. I can imagine it causing all kind of mayhem if it was available from this year
The top up is essentially the same rate as basic rate pensions tax relief.
I do wonder if they have thought out every possibility regarding the top-up, penalties.
Effectively it’s a SIP with a twist!
The Lifetime ISA seems almost too good to be true, assuming you are relatively well off I suppose. And relatively young.
I wonder how much this is going to cost as £1000 per year to all 18-40 year olds potentially seems a lot more expensive than the Child Trust Fund payments of £250 at zero and £250 at seven. Although I suppose it is very true that seven year olds are not big voters.
@Dave — The Lifetime ISA does seem very good if you qualify. However you write:
Remember nearly half the population has less than £500 in their entire savings. Most Monevator readers are far bigger savers (and higher earners) than the average person, so we always need to keep that in mind.
In reality, only a fraction of the eligible population will actually be saving the full £4,000 a year, particularly among the under-25s I’d guess.
But yes, great if you’ve got money or someone who will give it to you…
@Oliver — Yes, a SIPP with a twist is another way of looking at it. I do think some of the details will be refined (/changed) over the next 12 months.
@Dave — I know the feeling!
The one thing I’m a bit lost on (and apologies if I’ve missed it): before, I believe you could have one Cash ISA and one Stocks & Shares ISA and share your annual allowance between the two.
With the addition of the Lifetime ISA, can you then have three ISAs and spread the allowance between them all? Or does it mean ditching one? I imagine the former but you never know…
It sounds good, but it depends if its better to use up this Lifetime ISA or just pay continue to pay into a SIPP. I guess you’ll never know what changes the government will make in the future, so having some pension money in both will help protect against future changes.
@ash That’s the rub… can see that 60 withdrawal age shooting up. My immediate thought is putting £4k into the Lifetime pot and any reserves into a normal one would give you the best of both worlds.
@Jon — Yes, think I mentioned that you will be able to contribute to all ISAs in the article, up to the limit. 🙂 But yes it’s getting complicated and unclear (I get friends asking my about the Help to Buy ISA all the time for the same reason).
Anyway to quote The Treasury directly:
@Ash — The key is the optionality on buying a house. If you put money into a SIPP you can’t do that. With a Lifetime ISA you’ll have the option to get the money out for home buying.
@TA – thank you! Information overload but this is all really useful, as ever.
Thanks, very informative.
Not as many years between April 2017 and my 40th birthday as I might hope ;0)
Guess my issue with this is when I turn 58 they’ll suddenly announce at a Budget, Autumn Statement or ’emergency budget’ that I can only access the money from age 70…
… The issue with pensions is trusting the govt not to change the rules, not the tax treatment
Perhaps more detail will be fleshed out over the coming year but at first glance I don’t think I’d put money in based on my personal circs.
I’m (a) under-40 (b) a HRT-payer and (c) a homeowner.
For me, the LISA is effectively a top up pension scheme with (penalised) early access. While I still I have unused headroom in my actual pension I might as well use that vehicle?
Early access does seem to be an admin nightmare too.
The biggest takeaway for me is that the 40%(+) tax relief giveaway continues for pensions, at least for another year…
Hi, I’ve just got a quick question. Since transferring HtB ISAs will not count towards the contribution limit for 17/18, does this mean if I’ve started saving since the HtB ISA began, I can transfer £4200 (maximum contribution from December 2015 until April 2017), add £4000 and consequently get a bonus of £2050 for that tax year? It would seem like you can get the equivalent £3000 bonus from the government a year earlier than with the HtB ISA route.
@TI Also want to say a massive thank you for running this website. I’ve had to start managing my personal finances since I’ve started uni last September and this place is a truly invaluable resource. 🙂
@EoC — Yes, if you’ve got a house the Lifetime ISA plummets in relevance. That said — and as @Ash has already mentioned — perhaps there’s a small case for diversifying your sources of government tax relief / bonus top-ups, given pension fiddling may return to the agenda in the future (especially if you might become an additional rate taxpayer in the future, with pension relief being whittled away for them already).
@PA @Jon @MM — Cheers, you’re welcome!
@ Planting Acorns – I agree completely re. moving the goalposts. We have seen this many times for pensions and I would be amazed if we don’t see it for pension-like ISAs.
As it stands, this doesn’t look like a clear winner over ‘regular’ ISAs. My money will be locked up to 60+ and while it might come out tax free, it would have come out of my pension tax free as well (assuming I can stay within the limits). This wouldn’t have been too hard to do based on today’s money, we’re not all on six figure salaries!
I suppose that the additional compounding is the carrot vs. existing ISAs…
I will await developments, but at the moment I’m thinking that I will be sticking to the devils I know in the form of pensions and ISAs.
I have £16k invested in Vanguard index funds within a traditional ISA wrapper. I am 33 so eligible for one of these Life Time ISAs.
Anything to stop me drip feeding my £16k out of my existing ISA, into a new LTISA at the rate of £4k per annum and collecting the bonus each year? If I sell my holdings and buy them again on the same day in the new LTISA it won’t matter if the market goes up or down. All things being equal I would have increased my £16 k to £20k in 4 years through government contributions alone. Sounds too good to be true.
@LegalBeagle
There’s nothing in the technical paper to suggest that you won’t be able to do what you are suggesting, you may even be able to complete an ISA transfer for the monies.
It’s not realistically going to be possible for you to sell and buy index funds within a day unless you’re using ETFs tho, although the swings are unlikely to be too severe over the course of say a week.
The one thing missing in this suite of ISAs is a government top up on the Junior ISA. Perhaps that would be too close to the Brown CTF policy (although the new savings benefit for low income is very similar to the labour policy Savings Gateway). And children don’t vote.
@LegalBeagle
Yes you can do that but you suddenly have a massive limitation on your ISA.
It will be of different use to different people.
I’m fairly likely to buy a first home at some point – it would be a nice boost for that but I’d be wary of using too much of my saving power on it. If I don’t buy somewhere it’s merely a tool for pension diversification, with a similar level of tax relief (not as good as salary sacrifice).
@jon Probably a good idea. If i read correctly, all withdrawals from the Lifetime ISA when you’re 60 (or probably 100 by the time I get there) is tax free? While SIPP’s aren’t. But of course that would change. Bad side is you can’t get employer contributions (which wouldn’t effect me personally) so I guess this is something you should have along side a pension.
@The Investor Correct, I personally wouldn’t use it for a house, but as I’m in my late 20’s, this doesn’t seem like a bad way to boost my pension pot alongside my SIPP.
It also depends how ISA/SIPP providers will charge for these Lifetime ISAs. As SIPP holding fees tend to be higher than standard stocks & shares ISAs. Be curious to see what offerings are available closer to the time.
Does it have to be a first home, or any house purchase? If the latter I’m keen – when we trade up to a larger house that would help out very much (given the way house prices will keep growing with this support…)
@Peter It’s first home only with same conditions as HtB ISA if you’re looking to withdraw before 60.
It caps the property you can buy at £450k so totally pointless for my ambitions of buying in Zone 2 London. So I’m getting screwed over by paying taxes to give someone outside of London a step up onto the property ladder. Not happy
I just think this new isa is the shape of things to come. Osborne obviously fancied the pension Isa, but couldn’t get away with it for political reasons.
I just feel like he’s softening everybody up so it can be brought in at a later date. Especially with the big increase in the overall isa allowance.
Oh to be a whippersnapper under 40!
Looks like a good deal for me – my 32 year colleague who doesn’t have any kind of ISA has stated that she will start a Lifetime one to supplement her pension saving.
The lifetime ISA IS the pension ISA. Once it’s up and running, how much easier to withdraw the current pension tax relief arrangement….
Also, I imagine a fair proportion of the funds flowing into these lifetime ISAs will come from wealthy parents, basically another IHT reduction scheme.
Genuinely surprised salary sacrifice remains untouched. Must check if spouse can take advantage…
Agree with Vanguardfan, it is the Pension ISA but with an admission that they are going to have to run the two pension systems in parallel for many years.
It still doesn’t replace regular ISAs for flexibility what with not only losing the govts gift but also 5% if you take it out before 60 (60?! Thats like, really old man ;).
Well SIPP or salary sacrifice/employer pension still a clear winner for 40 something and 40% taxpayers who already have a house. Access at 55 (well for me) . Only bummer is tax on the way out. But with the personal allowance creeping up you’d still need a sizeable pot to pay that much income tax.
I like the increase in ISAs to 20k. To be honest there can’t be many people who can afford to max out 20k pa on top of living costs, mortgage payments, and pension contributions apart from the rich and super frugal.
But a 20k pa allowance will make it easier and quicker to squirrel the 25% tax free lump sum from pension into ISAs when the time comes, taking a quarter of your pot outside of income tax.
Grumble not, its an ok budget. It could have been a lot worse!
If you want to buy a London property at my age (31) then you need to be more than maxing out the new 20k ISA limit for several years to stand a chance… Not easy buying in London without an Oligarch’s wallet or the bank of mom and dad to help
I suppose the answer is not to buy in London then. It would be political suicide to introduce a tax-payer subsidy to enable the purchase of a £800,000+ property in Zone 2. There are enough questions around it existing for a £450,000 property.
Hi All,
Going to show my age now! This 20k limit is finally getting to where we were in the early 90’s. Back then you had a pep, single company pep, and Tessa amounting to around 15k. To put that in context I bought my first house then for 60k. That same house is worth 250k today, but I think a 62.5k ISA is perhaps too much to dream about!
Of course what are the thoughts on the fact future governments will want to tinker and tax them? Even if it’s by obfuscation. The fact 10years maxing out these gives a pretty big nest egg even shoving it in ETF’ s seems just to tempting.
Off topic I like the fact lifetime allowance wasn’t tinkered with and I was sure the 25% tax free lump sum was going to be tinkered with, so the fact it hasn’t is welcome.
Smart move. The Pension ISA is rejected by the industry scared of their fees shrinking so stick it out there in the wild regardless and see if punters take it up, then sort out the mess.
It’s preferential to a SIPP for low earners (anyone can put 2.8k in their pension and get a top-up), so you end up with an established base of lower income holders. Same tie-in, but no tax at 60 and a free option if you happen to buy a house. Addresses the principal objection people have “well I’m saving it for a deposit” or “my house is my pension”.
Also means that the SIPP must just be for employment. Perhaps you get to offer to transfer some limited amount into the LISA (no extra top-up available).
Later on you put in flat relief on SIPPs, and everything starts to look the same. Eventually you remove the tax deferral.
There’s a veritable buffet of options for future Budgets. Very smart. Some Chancellor in 20 years time should be thanking this one’s vision.
@Mathmo @SemiPassive @Vanguard Fan
Indeed…I’ll probably open one of these if nothing else because 60 is younger than 67(?) and then I won’t have to worry about the ever decreasing lifetime allowance shrinking to a level it effects me…
…but a quick word on fees… I’ve always thought to myself SIPPs are dearer than ISA’s because the consumer is inputting money gross and therefore less careful with it…Will providers be lining up to have their slice of the 1k top up for LISA’s…you know it !
…if you can’t contribute to this LISA between 40-60 I for one don’t want to be paying £200/year plus a percentage !
@Blackadder… idk. It is open to everyone…bit like child benefit was. Some parents would have spent the child benefit on discounted veg to put in a stew, others on the hair style they need to be seen at the school gates…but nobody minded…
I live in Zone 2 (homeowner no parental help) … Its something people should be able to realistically acheive if they’re working in London… And something that could be achieved if we just built more homes !
“But that aside, I don’t think it will represent a transfer from richer to poorer, because in reality the only 18-21-year-olds, say, who are going to be putting away £4,000 a year will be those with wealthy relatives who give them the cash to do so.” – I don’t agree, it’s definitely a transfer of wealth from the relatively ‘rich’ to the relatively ‘poor’ as those that benefit the most at the expense of the tax payer will be those with relatives wealthy enough to give them a bung, thus affording the already wealthy proportionally more largess at the states expense. I don’t see how you see this not to be the case?
Seems like a bit of a middle ground to me, on the retirement side of the Lifetime ISA. Not as good as tax relief as potentially available in a Pension if you are a higher rate tax payer, and the money is potentially tied up for longer. But better than a normal ISA if you do stick it out. I’m worried about tying up money for too long in a pension as it is 🙂
The cynic in me says it’s a stepping stone towards a pension overhaul. On the other side, it’s more diversification.
That said, to buy a first house it is a huge boost! Although it doesn’t help if we think houses are overpriced 😉
@mrzombie – by the time today’s 40 year olds are 60, the state retirement age is likely to be 70 and no one will be able to access pensions before 60…
As a frugal a 30 something, I fear that come age 70, i’ll get a pat on the back for my good work in saving money into personal and employer pensions, ISAs and the like, and as a reward, they will remove state pensions from me, while rewarding the reckless buffoons with free money, leaving me to regret my frugal ways.
Putting £4k into the new Lifetime ISA feels sensible ONLY after claiming higher rate relief, as it gives the same 25% advantage with greater flexibility…
May as well blow the rest on cars, women, children and booze, like a good little consumer.
@PlantingAcorns Am I missing something about your reference to 60 being younger than 67? Isn’t the relevant comparison 60 for the LISA vs 57 for access to a SIPP?
@all — Hmm, I thought I was being ahead of the game in seeing the bones of a discarded Pension ISA in the Lifetime ISA as noted in my original post (nobody was saying this in yesterday’s TV coverage) but I now think you smarty-pants readers are one step ahead again, in looking at the entrails and seeing the foundations of a Pension ISA to come. (Copyright: The Investor – Making a mess with mixed metaphors since 2007!)
@ep — Hi! You write:
I presume you mean “it’s definitely a transfer of wealth from the relatively ‘poor’ to the relatively ‘rich’? But I won’t correct your post just in case I’m having some kind of brain failure. 🙂
Anyway. Similar to the Pension ISA comments above, when I wrote that I didn’t think it was hands-down help-you-up from George to the poorer young yesterday, I again felt a bit controversial, a bit radical. And again the tone of yesterday’s coverage was all “this is a great help for young people”. So feels a bit odd to now be arguing the other side. 🙂
But I think I can, especially as you write: “it’s definitely a transfer of wealth”
Whatever side of the fence we come down on “definitely” is far too strong in my humble opinion; we will not know definitively until several years data is in.
However my gut feeling is it’s probably a wash. (i.e. The relative poor and relatively rich will stay as they were before, all told).
First up, rich people gonna be rich people. They were giving money to their kids/grandchildren before the Lifetime ISA was introduced, and they will afterwards, often in ways that are tax-advantaged. (E.g. Think of all the inheritance tax wheezes).
However even rich people can only give their money once. (Simplifying, but overwhelmingly true). So if they give £4K to stock a Lifetime ISA, they can’t give the same £4K in some other way that again disadvantages the taxpayer.
For example, if I’m Rich Dad and I give my Well-Off Son £4K pocket money for Christmas, then well-off son might well decide to spend Dad’s money on the groceries at Ocado and instead contribute an extra £4K from his own salary to his pension. This would attract basic rate tax relief, and very likely higher-rate tax relief if said Son is over 30 or so. (So even better than the Lifetime ISA).
You might say Dad will now give *more* than before, but that’s moot, I’d argue, in most cases, given how generous the pension contribution reliefs are already. (Perhaps a bit more to the younger ones who haven’t bought property yet, but to be honest they tend to do this mid-20s when using the Bank of Mum and Dad so only a few years worth of potential taxpayer bung-age for them.)
I’m sure there are other examples; I’m not a tax avoidance expert.
So even from that, for rich people I don’t think it’s the mild game changer it might seem to those of us from more humble backgrounds (like moi).
In fact, I credit the Treasury with designing the system such that it isn’t effectively just a Force Multiplier for Bank of Mum and Dad house deposits, in that you can only contribute £4K a year.
As others on this thread have noted, it’s going to take many years to build up a decent house deposit at that rate if looking to buy in the prosperous parts of the country. (Perhaps uselessly so, if prices outpace you). Whereas for more normal folk in the provinces/Northern Powerhouse/wherever, even a £5K bonus over 5 years (and compounded, too) is a big difference on say a £100K starter flat. (A flat whose price might well by then be bid up to £105K due to the extra government money, but that’s for another debate. 🙂 )
Finally, there’s the distribution of rich and poor. Most people are not rich and with rich parents, though again I well understand it feels like that in London. (As I’ve said many times, I can count on one hand the number of my friends who bought without parental assistance, of more than two dozen or so that I know the details of, so I feel the cynicism too).
But remember, 4/10 people have less than £500 in savings — whatever their age! That’s nearly half the population who have basically no money.
Let’s be bold though and estimate that 20-30% of the Lifetime ISA users are in the topped-up by Mum and Dad bracket on a *nationwide* basis. (I’m sure it’ll be a higher proportion down here in London, but much lower elsewhere).
That still leaves 70-80% who are getting ‘free’ government/taxpayer money they wouldn’t otherwise have had.
Of course many of those won’t be able to find the spare £4K a year; perhaps only half, say, or 40% of the total, with the rest (under 25 or lower earners) only contributing a few hundred quid a year.
Net all that out and I think it’s probably roughly a wash — even ignoring my point above that rich people are always helping their kids get richer, often at the taxpayers expense (heck, I know five-year olds with five-figure pensions already!).
But yes, it’s possible that on balance it could end up slightly favouring the wealthier over the poorer. But it could to my mind just as easily go the other way.
“Definitely” doesn’t yet come in to it, as I see it. 🙂
@ Steve – NO! I was just wrong. That makes case for LISA far less compelling to me. (Thanks to you and MR Z )
It’s interesting to see so few articles (BBC, Guardian, Telegraph etc.) comparing the new Lifetime ISA with SIPPs (though comments here have touched upon this).
As a basic rate tax payer, from what I can see re. the Lifetime ISA vs SIPPs:
The only advantage with a SIPP, is that I’ll *currently* be able to get access to it three years earlier at 57 (though as @Vanguardfan mentions, no one at 40 today is likely to have access to their pensions until 60, let alone those of us who are younger).
The Lifetime ISA on the other hand seems (to me at least) to offer the added benefit that you get the same bump/bonus when you put your money in as you would with a SIPP, but without the downside of having to pay tax on it’s way out (once over the personal allowance). A double bump if you will, similar to the one that higher rate tax payers can potentially get by claiming 40% relief now, and only paying 20% tax on retirement.
My final thoughts are on the flexibility. Most people see this as a good thing, though if for example you’re incapacitated and unable to work (or are maybe even sued), I wonder if you’ll be required to withdraw from the Lifetime ISA first (which in addition has the 5% charge). At least in a SIPP the money isn’t really accessible.
It’ll be interesting to see what providers charge for these Lifetime ISA pots. One thing that’s not been mentioned yet though, is that it’s sure to complicate the cheapest brokers table somewhat!
The government has set an arbitrary £450k limit to house purchase cost under HTB and LISA. I disagree with the argument which says that if you want to buy a house which is more than this then I should leave London.
I am from a working class background and me and my wife both work very hard to live in London Zone 2 and we love living here. An average one bed in this area if £600k. We want to stay in this area and are saving £2-3k a month to build up a deposit to buy here. We are by no means rich. I think people living outside of London have no concept of this… Owning a property worth £1m in London does not make someone rich… Likely they bought it many years ago and have seen insane house price growth, and may have had quite modest incomes throughout their life, whilst a younger person now would need to earn a fortune to ever afford a similar property – it really is that simple.
If the government is subsidising housing below £450k then the affect is to raise all housing across the board as more money is available in the system for this purpose. Much like the fact that having lower interest rates means that house prices increase, because people can afford to borrow more and still be within their means due to the lower cost of borrowing.
If the average purchaser has a few thousand extra due to the government top up on the LISA then due to a greater amount of money chasing the same scarce resource prices across the board will rise. The £450k is just an arbitrary number put in for political reasons. Some of the areas in London which are now very expensive were not only 5 years or so ago, to say that people need to move 1 hour away from their infrastructure, work, family etc. so as to not be so greedy is wrong (Note: the analysis of Lisa yesterday said the policy will add 0.3% onto house price growth).
@Matt — I know exactly where you’re coming from with London, house price growth, and relative wealth, as you may know from my years of posting on the site, and it sounds like we may have a similar family background.
However one thing the housing bulls have always got right is that not “everyone” who wants to (by a very long shot) can live in Zone 2, by definition, short of building several *thousand* Shard style skyscrapers.
Hence government policy can’t really be made with that cohort in mind. You can still buy a house in Zone 4/5/6 for £450K, which I think from the government’s POV is perhaps a reasonable compromise, if one accepts there is no perfect answer.
Notice that the reduction in CGT rate pointedly excludes second homes.
That does nothing to encourage the landlord community, to release unwanted rental housing, with significant accrued capital gains, on to the market.
So no help there on the availablity front for the benefit of potential first time buyers.
But then such a CGT reduction, for those wicked and unscrupulous landlords, could hardly be expected to go down well in the present political climate!
@Matt
the government shouldn’t be subsidising house purchases anywhere. All this extra money will serve to do is inflate house prices that little bit more and put house buyers in the exact same position that they’re in now. Plus, given how ridiculous house prices in Zone 1 and 2 are would the extra £1k p.a. really have made enough of a difference anyway?
@Pete
I totally agree that the government shouldn’t subsidise housing at all. Instead the laws should be tightened up on those who used homes as piggy bank to make a 10% YoY return (in the new build market this isn’t working out too well right now), and also built more to try and keep house price inflation is in line with other levels. It’s crazy that housing is only 10-12% of the CPI calculation yet some people are spending 60% or more on their rent/mortgages.
I totally agree that an extra few grand doesn’t make a difference, however as I say the problem is that i actually hurts everyone as prices rise across the board when more cash in nominal terms is chasing the same level of fixed assets (or growing slowly at least). It’s clear that it’s government policy across the board to push up house prices…
@Matt – check out the new ‘London Help to Buy’ that is a much higher 600k with the man lending a huge 40pc interest free for five years…quite what one will do in years 6 onwards I don’t know but has to be worth googling
39 years 11 months and a bit in Apr 17 – looks like I just squeak in so not really the target audience but this seems like the potential for free money with no downside.
As I understand it I open the LISA and from Apr 17 switch contributions from ISA to LISA (not managing to squirrel away more than £4000 pa yet.) The govt put in £1000pa until I hit 50 then I carry on contributing without the top up.
At this point there seem to be 2 scenarios:
1) I plod on to 60+ retire and pocket the £11,000 +interest the govt has kindly donated
2) My career takes off/investments go well and I call it a day at say 55 and decide to draw down the LISA. I lose the govt contribution but the LISA acts like the rest of my standard ISA.
In effect it is an ISA subaccount providing a bonus payment if FiRe doesn’t happen. So unless platform providers slip in a higher platform charge for LISA than ISA I see no downside to using it – or am I missing something?
Clive
The point that appears to have been missed so far as far as I can see on the lifetime ISA versus SIPP is the interaction with the UK benefits system
£16,000 in a SIPP – complete access to benefits system
£16,000 in any type of ISA – very limited access to benefits as you have accessible savings
Particularly relevant to lower earners and people with health issues
Hi, im new to investing and have never had an isa before. What if I have more than 15k to invest in a s&s isa, where would I put any addional money if I exceed my isa allowance? Also what happens to that isa in the next text year, do I keep feeding into it? I want to passively invest but the isa seems to create abit more work. Sorry if these sound like simple questions, total newb! Thanks in advance
The easiest way to handle the bonus would be for the Government (ie taxpayers) to add the bonus to the total sum withdrawn when the account is closed (at 60+) or used for house purchase. As it would be a percentage of the amount, it would of course include any growth.
This has the advantage (for the Chancellor) of delaying the cost for a few decades!
The owner of the ISA just has to trust that the government will make the promised contribution when the time comes. But you would be trusting the government to not change the tax rules anyway.
The only losers would be the next generation, and as the Chancellor said, ‘this is a budget for the next generation (…to pay for)’
k
Hey Grainne,
You can invest in one cash AND one stocks and shares ISA per TAX year.
So you have a week or so to put this tax year’s allowance into an ISA and you can then put next tax year’s allowance into an ISA on April 6 (making a total of c.30k minus what you have or will put into cash ISAs).
If you have a lot more than 30k might be worth to skipping to the part about seeing a financial advisor ;0)
You can only open one S&S ISA per year…then in the second year you can add to it or open a different one…
Essentially if you’ve decided you definitely want to put your money in a S&S ISA, rather than a pension say, take a look round this site and others about which ‘broker’ or ‘fund supermarket’ you wish to use, go to their website, open an ISA up and put cash in it asap.
Then take your time deciding which investments to buy with that cash. The cash can sit in the ISA for ever…its just important to get it in before the tax year ends.
I’ve read half the articles on here (including every ‘slow and steady portfolio’ one) and I’ve decided which investments are right for me…but I’ve a DB pension to fall back on and do this for fun as much for survival and
you may well decide to speak to a financial advisor…
PS – ISA’s make life a lot easier not harder, because there’s no capital gains or income tax to work out…
I hope that helps.
@all … I’m not precious if any of this is wrong please do chime in
Grainne – you can add to an ISA as often as you like, provided you stay within the annual limit in each tax year.
So you can set up an ISA and put in as much as you like to start off with, and then add to it as you choose – I made a lump sum deposit of the whole ISA limit in my first year, another lump the next year, and then drip feed in amounts on a monthly basis to grow it over time.
It’s not really than onerous once it’s up and running – it takes a while to setup, but you can automate monthly transfers in, and automate which fund(s) the ISA invests in if you are making regular deposits.
You’ll need to consider where to put your money – this site has an excellent series of articles on various different model portfolios, and a comparison on the various providers and their charges and terms. Personally, I like things nice and simple, so I chose a Lifestrategy fund, but you’ll need to weigh up where is best for your money.
Finally, I’d recommend having a good browse over the various articles on monevator. They cover most questions that a novice investor might have.
We can be certain George Osborne won’t be Chancellor of the Exchequer in forty years time so his intentions as regard the LISA aren’t necessarily going to happen (eg if he was hoping it would replace pension saving)
In my opinion though, that’s not what’s going on here… the Tories want us to move from being a nation of spenders who only invest in real estate to a nation of savers who invest in the real economy (having bought their own home)… In conjunction with the capital gains tax changes this budget nudges us in that direction…
Its the sugar tax we should be working ourselves into a fury about ! What’s next? A book burning ?
Thank you for the helpful advice @plantingacorns and @thetaxmancometh. I have a civil service pension with work and will look to invest in a lifetime isa next year to supplement my pension. My current plan is to invest in Vanguard Lifestrategy 80 or 100, which is high risk but I intend to feed into it and ignore it for at least the next 10 years. What Lifestrategy did you invest in @thetaxmancometh? My goal is to retire as early as possible. Thanks again, great site!
You could access your private pension when you reached 50 then a few years ago it was changed to 55. Its going to be 57 in 2028 and this new style Lifetime ISA its going to be 60. Its only a matter of time before its 65 and I’m sure it wont stop there. That is the problem with locking money away for long periods the rules are constantly changed and not usually to your benefit. Now we have more Isa’s than you can shake a stick at lol.
Anything to get the taxpayer paying more into the housing market…
@Clive re. your point 2)
If you withdraw the money at 55, not only will you lose the government bonus on the amount withdrawn, but you’ll also be charged 5% (for being a very naughty boy and withdrawing before 60).
Problem with London Help to Buy is it is for new builds only – also the developers chose whether they will accept help to buy buyers, and some developers prefer not to (in zone 2) for whatever reason. Mostly London HTB is being used in new builds in Zones 3-4, and I have read recently – sorry can’t find the source right now – that in these areas many new builds are being significantly overpriced compared to existing properties in these areas, so essentially any benefit is being wiped out by the developer over pricing.
with help to buy, does the government get to count their % as an asset? If so, pushing up house price will surely make their balance sheet look better? Any fall will make it much worse. When do they start counting the rent income?
If so, the government is becoming even more entwined in the housing market and its success.
@ Jonny
Knew there must be a catch! Thanks for the warning.
Clive
Here’s my take on the lifetime ISA.
As a savings vehicle for a house (by the way I disagree with the government subsiding saving for a house as more money chasing the same supply of housing just means higher prices for all):
– It’s a great boost from the government for first time buyers and more generous than the HtBI
– The 450k is no longer limited to just London which makes this very appealing to anybody buying a house outside of London.
– In London, there’s the issue that 450k won’t buy you very much, and who knows how much house price growth there will be between now and when you come to buy.
– The withdrawal charge of 5% is very unattractive making this fairly inflexible. You need to be pretty confident that you’re going to be able to buy a house and receive the bonus (or use for a pension – see below).
– I expect that the cash returns will be less attractive than current HtBI and will be more in line with Cash ISA rates as this has dual purpose and there will be less scope for obtaining future profitable business (ie mortgages) for providers. In the short term rates may be higher to attract new business.
– Yes, you could invest in other assets (ie equities) but that’s not a sensible option if you have a short time horizon.
As an alternative to a pension:
– The bonus is equivalent to lower rate tax relief, but a 25% reduction relative to higher rate tax (HRT) relief.
– If you benefit from a salary sacrifice scheme you’re worse off to the tune of 15% as a lower rate taxpayer and 27.5% as a higher rate taxpayer.
– There’s also no 25% tax free lump sum.
– However, any money drawn from age 60 is tax free whilst the current system attracts tax. This benefit depends on how much income you take once you start withdrawing.
– If you consider that the majority of retirees have a pension pot lower than £50,000 (I’m sure that’s very different for Monevator readers) then the average person is unlikely to pay any tax under the existing pension system so this is of no benefit at all.
– And don’t forget, there’s a possibility that a future chancellor decides instead to tax future pension withdrawals under such a system!
So all in all, unless you live outside of London and can put it to work for your house deposit, I think the Lifetime ISA is a pretty bad deal but the chancellor seems to have done a fantastic job of selling it to the masses. As many have posted I firmly believe this is George’s way of introducing the Pension ISA through the back door. It’s a bad idea, as we all know.
I’ll say thank you very much for the additional ISA allowance and continue to cram as much money into my pension whilst I can take advantage of HRT relief and salary sacrifice (I expect both to not be around for much longer!). For information I’m in my mid twenties, living in London, lucky enough to be earning a little over the HRT theshold with no property. I have taken out a HtBI but with returns of 4% tax free it would be stupid not to whether I get the bonus or not.
Oh, and if my post wasn’t long enough I forgot about employer contributions which are not offered on the Lifetime ISA. If this a choice between a pension and a Lifetime ISA then an individual choosing a Lifetime ISA will be missing out on a large contribution from their employer.
Another source of revenue for the chancellor in the future would be to make employer contributions subject to tax and NI. I would worry very much about such a policy change as it would likely result in a significant fall in pension contributions and a lower standard of living for future generations in retirement.
@vanguardfan
I completely agree, it is simply a way for parents feeling sorry about their children’s future state pensions to save one up for them so the kids can get on and try to save for a house instead. It also means they don’t have to feel responsible for releasing equity from their own homes, downsizing or flogging the holiday home to get their darlings onto the housing ladder with a massive deposit – let them be responsible for that. They can stuff it with 4000 every year on the agreement that the children don’t touch it till their 60, parents will likely still be alive to make sure they don’t or they can write them out the will.
JISAs are a bit of a joke really, not really worth the hassle and I’ve just had major hassle with my sons one as the JISA provider failed to contact the CTF people and transfer it over so it’s effectively void. In the process of sorting that fine mess out…lucky I found out early.I reckon there are lots of parents out there who’ve forgotten about the CTF, opened up JISAs and if the provider is as shoddy as mine was will have an 18 year old very disappointed with a null account and no growth over 5/6 years. No skin off the providers back and they can keep the interest, how convenient…
I have a few concerns with this. If people see this as the way to save for retirement instead of a pension, will they be able to resist emptying to buy a house at 35? I would guess they will buy the biggest house they can and have to start saving for their pension all over again.
Also how many of these will be saved in cash? I bet most will for 2 reasons. 1) if you are going to use it for a house you don’t want it to lose value – even if for 10 years it still will feel short term. 2) most people don’t want to bother thinking about investing themselves. At least a pension is an easy way for people to access the markets without thinking to much about it.
I would think most people will have less in retirement than they could have if they saved straight into a pension from a young age.
@Richard … Is this even about pensions ? I think we’ve all got “pensions ISA” thought process because we’re monevator readers…
…this isn’t a replacement for a pension it’s just a suped up help to buy ISA… The withdraw penalty free at 60 caveat is added to stop the whinging there would be if it was for buying a home only…
…why else only let people open one when they’re young(ish) and stop contributing at 50?? There’s the rub…no way any form of saving intended to be used to fund old age would stop at age 50…
I’m going to open one of these and max it out with stocks/shares (may put the bonus into gilts each year so its as close to a no lose bet as one can take) and then use the money in retirement…but I’d put good money on the vast majority of these will be in cash and used to fund deposits …
You get it, I get it but will your average person get it? How many people don’t pay into a pension even though their employer matches (I know people who didn’t pay into very generous DB pensions……)?
Why invest in a pension? They get the same free money in the Lisa (excluding match), can use it to buy a house or retire. That makes sense, easy to understand, easy to use, clear, bonus sounds good. Or pay into a pension with something about tax benefits and shares and can’t access until 57 no matter what and yawn yawn. I wonder how many will opt out of their pensions to pay into this instead? Only when it is too late will they realise they don’t have enough to retire.
I hope I am wrong though.
Interestingly, I have just had a conversation and am already being told to pay into this ISA by family and friends. Get an extra £1000. Yet I am better off paying into a pension as I own my own house already, can access it earlier, get employer NI etc. People see the free £1000 and that is about it. It doesn’t compute that tax relief is the same logic as a bonus. Plus pensions have a bad reputation that ISAs don’t. I worry this is the thought process a lot of people will have.
Long-term readers may remember when we all gave our submissions to the Pensions Consultation, via The Accumulator, who for his part advised The Treasury in the article:
http://monevator.com/have-your-say-on-the-future-of-pensions/
Sounds familiar? 🙂
@Richard
“with help to buy, does the government get to count their % as an asset?”
The government takes a proportional amount of any gain or loss at time of sale, if that’s what you mean. I’d expect it to be recorded as an asset. After five years it even generates income.
@TI – exactly, great points! I have experienced the psychology of this myself. I pay into a work pension and into a SIPP. The work pension vanishes out of my pay check. I hardly notice it (other than the reduced income). It is just a line on the out going. Psychologically that was always my money. So rather than keeping it, I am tying it up for 30 odd years. Think what else I could spend it on. I get nothing telling me how much tax I saved on it/how much the governement gave me. I take any drop in value as an assault on my money.
Now my SIPP, I pay that physically out of my bank account. Then the government writes me a cheque that gets added to it. Totally different feeling. I have got something for nothing, I feel good. I also think I can absorb more loss as not all that money was mine in the first place.
@learner – so as they slowly increase their % of property owned through this scheme, they have a much more invested incentive in preventing ANY drop in prices. Sounds dangerous to me…..
@Richard … People not paying into pensions was a problem long before the LISA…
I remember having dinner with some friends a few years ago…all of us were living / working in London. Most of the conversation was related to who’s sexing who, where we’re going on holiday, etc etc, you know, normal mid 20’s stuff… But somehow pensions came up.
One of my friends had been told by an older colleague he should up his pension contributions to the maximum the company (Bank of America) would match for his level, which was a further £200/month. I said I agreed with his colleague – he’d see £160 less in his pay check but be £400 better off… But he was worried banks wouldn’t lend him enough to buy a home if he used his pay in this way…
He bought a two bed flat in Beckenham in 2012 for £275k, similar one in his block sold for over £400k late last year…
So he’s probably not looking back on that conversation thinking he made a mistake.
…I guess my point is, if you can’t get people to forgo £160/month to gain £400 a different approach to encouraging saving is needed.
On a separate note – sounds like I’m in a similar position to you (home owner/ higher rate tax payer/ company pension) but I’ve chosen to do further saving via an ISA (and will use LISA) rather than SIPP because I am worried both that the ever decreasing lifetime allowance will fall to a level it catches modest savers and given the ridiculous amount of fiscal drag we’ve seen the past six years I’m not sure I won’t be a higher rate tax payer in retirement. Not because I earn a great deal, but because that higher rate limit just wont budge…
Reading through all the excellent responses here, I wonder if the attractions of the Lifetime ISA are being slightly undersold due to some understandable cynicism about long-term commitments by the Government.
On the face of it, a 25% bonus up-front and no tax on the way out is a very good deal for the typical young Monevator reader, I’d have thought.
Reading through the press today, some journalists really don’t seem to understand that income from a pension is taxed on withdrawal, after a certain threshold and ignoring the tax-free lump sum. They just see the tax relief upfront.
True with smaller pension pots the situation is more nuanced (due to the personal allowance) but is that likely to be the typical situation for today’s young Monevator reader in 30 years time? (I hope not, or we’ve not done our job properly! 😉 )
If I was young enough to qualify then even as a higher-rate taxpayer I’d open LISA I think, even just as has been said by myself and others to diversify the tax reliefs.
True, the rules on access age could change and (less likely I believe) the tax-free withdrawal element could be tampered with. But that’s true of any long-term government scheme, so a bit of a wash for me.
I think the main benefit for those with existing pensions and a house is the option of big tax free withdrawals.
Imagine one year after 60 you have a large unexpected cost for example, health care costs. Withdrawing more from a standard pension could throw you up into the higher rate tax band. However having the lifetime ISA as a backup to your existing pension means you can withdraw a large chunk tax free for an emergency.
Who knows what great innovation might bring in the next 50 years, we could be buying expensive robot bodies to replace our worn out ones!
@PA, I agree with you. My main concern is your friend may have decided to put ALL his money into a LISA rather than into a pension aimed at the short term house purchase. So at the end he would have £0 in his pension and a fat wedge in his LISA. Then he comes to buy a house. Empty his LISA and get a £350k house instead of a £275k house. Great, probably worth £500k today. But he has to hope house prices stay up and has to downsize to release that money. As well as higher morgatage payments. And all his eggs are in one expensive house. Depends on what he does next and how much time he has left really. If 23 then not so bad. If 40 then getting harder to save enough (esp if in a cash version of the ISA).
Not sure what I will do with regards to the LISA. Partly depends on what happens with pensions over the next few years. I will probably open one so I have it and just pay a bit in for now.
@Richard… Ah I see your point, can’t speak for my friend but what you’re saying makes a lot of sense.
What is also worrying is that he may find that because of this scheme, the £350k house is actually the same house £275k would have bought without these schemes……
I think it is worthwhile investing in a Lifetime ISA (compared to £4K more in an ISA) if you haven’t bought a house – even if you think houses are vastly overpriced – as:
(a) You can flip a first property you buy for cash (e.g. a mobile home around £35K+, then sell it after some minimum holding period) to lock in the 25% tax free gain courtesy of the government (You are very well protected as the capital cost was low and the government takes the first 25% hit if you buy using just the Lifetime ISA and mobile home prices do crash).
(b) You can buy a proper first property (and wait it out to do so until house prices have crashed).
(c) You can wait and accumulate then do (a) if you can wait no longer, otherwise do (b) when the opportunity arises.
(d) Hold it until 60 to lock in the 25% gain courtesy of the government.
(e) Accept the 5% penalty for the optionality (of (a), (b), (c) and (d)) over an ISA which I think is worth accepting.
(f) I see the risk of introducing a taxed withdrawal as low for now, since if they tried to, you’d just withdraw with the stated 5% penalty (it pays to watch the budget and keep the afternoon free – e.g. transact and crystallise before the midnight deadline on a horrible adverse change! For LISA, you want a provider with a fully automated withdrawal process for this reason…..
SIPPs are not really viewed as restrictive for individuals if they also invest fully for ISAs subscriptions. Those individuals don’t need the flexibility in the SIPPs as they have it in the ISAs anyway.
It is pretty clear that now – more than ever – you need to be fleet of foot in terms of investment vehicle allocation in the UK. You also absolutely need to pay attention to the medium to long term goals/aspirations of the politicians who used to just tinker and tweak, but now make much more substantial changes.
Some comments:
@The Investor – You mention optionality. Optionality is incredibly important, particularly around legislative change and tax wrappers. For example, the new Flexible ISA arrangements coming in on 6th April 2016 are very useful to those with large ISA balances. Essentially you can withdraw 100% of your ISA balance (however large) and repatriate it within the ISA in the same tax year (providing the ISA manager allows this) without any tax implications. I’m thinking it could get creative on paying down an entire interest only mortgage for say 350 days in each year but keeping that money ISA wrapped (maybe not now, but if interest rates go up substantially). Or use it to break a house chain on moving (as you can temporarily own two properties, one mortgaged, one mortgage free). Or some sort of arbitrage if a cap is introduced on ISA balances (e.g. don’t do a permanent withdrawal, withdraw and repatriate and earn outside the ISA, maybe in a company loan to a Close Investment Company) . If you put yourself in a position where you aren’t a forced seller of assets, or forced into withdrawal from investment vehicles, you get lots of opportunities like this as rules change.
@Planting Acorns – Legislative risk around mainstream personal taxation (of which pensions is the biggest) is real, ongoing and demands lots of attention. The perceived threat of future change can be very useful and demands attention beyond the headline, to what I call secondary and tertiary political and legislative implications. For example, I think it is highly likely the LTA will be abolished in the next 35 years (before I am forced to suck it up at 75) purely because it will (a) have been such a successful up front behavioural deterrent and that is it’s purpose, (b) it creates such a nightmare for pension scheme administrators and employers, (c) it is very unpopular by all and (d) the Treasury is concerned with upfront tax relief now, not 55% on unknown amounts in decades to come under some legacy pension system. Whilst I get relief comprised of 40% – 60% Income Tax, 2% Employee NI and 13.8% Employer NI via salary sacrifice then I’m happy with large SIPP contributions, even with 55% tax on the way out at 75 as the default no change option (the reduction in LTA is more painful and harder to model, but I’ve decided to suck it up as I ws just a little too low when they started hammering it down from £1.8M -> £1M). If salary sacrifice goes, or reliefs are capped, I stop and never contribute again. If I’m wrong, then maybe stage exit left on a QROPS.
@LegalBeagle – My children are both under 10 and already have significant Child Trust Fund balances (they will be transferred to JISAs at some point). This LISA tax break is worth 5 figures for each of them on just drip feeding inspecie transfers into a LISA (and likely much more as the intention is continue to subscribe in full each year). Whether they buy a house or a mobile home will depend on market conditions. You can be sure the wealth planners will be all over this one.
@Mr Zombie @The Investor – There is always the issue of who can make use of benefits like the LISA. Clearly, those with time, money and a better understanding are at an enormous (insurmountable?) advantage, but it really does require all three to make significant gains from proper financial planning. What is really needed for fairness is to ensure those who can’t afford to utilise schemes/allowances because they can’t raise the cash (but would otherwise qualify) can in some way sell the allowance on to someone who can. The benefits would need to be a lot less generous due to increase in general overall take up, but at least the lower earners would benefit a little. More importantly, they would be engaged in the process of personal financial education. Most of personal finance is only relevant if they can save, otherwise it is redundant (aside from budgeting and avoiding debt) until such time as they have substantially increased their earnings, or significantly reduced spending/paid down borrowing. Why not make that wealthy 30 year old buy up a £1000 LISA benefit by paying 4 other under 30’s £100 each for the £200 allowance each gets (5 x £200 allowance = £1000). If there is a rights issue and you don’t subsribe, you can sell your rights to subscribe to another investor. Is it really that different if the anology is Country = Company, Citizen = Shareholder?
@KISS – I think the state pension will be means tested in 35-40 years time. Should millionaire (property) pensioners who paid much lower percentage NI (which was capped) than the millennials do now, get a full state pension? There is no reason to pay a pension to a pensioner living in a £1M property other than they vote and their vote counts (particularly as 95%+ will have bought it for 1/3rd or less many years ago and not had to pay tax on the gain). If the government needs to, it should pay the pension and have a charge on the property for a refund on disposal with a say 7% compounded interest rate built in (or how about the same rate as for that years student loans! – a nice inter generational link). The question is whether you can look beyond the state pension and say, I think it will be irrelevant for my level of saving/investing, unfortunately, for some, they probably are better off not saving but i’d always want to try and be my own chancellor, rather than rely on the unknown chancellors in 20-30 years time.
@Steve – SIPP is still 55 at the moment. They haven’t introduced the legislation for 57 yet (although it was announced as a done deal at the time).
@Matt @The Investor @megneto – Housing in London. Is it riskier to lend/borrow 120% on £500K (in 2006, think Northern Rock) or 80% on £800K (in 2016) – same London flat. All bank risk models assume it is less risky to loan at 80% LTV rather than 125% LTV, without questioning how realistic the V is on that LTV. The V is seemingly just current market price. If banks thought Northern Rock was nuts to lend at 125% LTV on £500K in 2006, then why are they happy to lend at 80% LTV on £800K for the same property? Does anyone seriously believe the outlook is better now than it was thought to be in 2006? Don’t forget that all mortgages since 2009/10 ish reset to lender made up rate. It doesn’t require interest rates to rise, just for negative equity as that precipitates mortgage prisoners on 5% which will probably drive a highly aggressive negative feedback loop (unless perpetual, interest only mortgages, fixed at -1.5% for 30 years are on offer, then I’m a probably a buyer!). Plus the lender can’t split the book and do different rates as there is only one lender made up rate. A real mess and disaster waiting to happen. As megneto says, there is a trap to CGT in so much as unless you think a property will fall by 28% in value, why would you ever sell, unless forced to – hence the BTL tax changes on mortgage interest deductions.
@Neverland – Aren’t most people in a position to use ISAs/SIPPs/LISAs in any significant way unlikely to be those that access the benefit system (either now or in near future). Genuinely interested as I’ve no experience of this.
@Kraggash – I don’t think many people would trust the government to add 20% to a six figure balance at 60. I know I wouldn’t, it is hard enough to trust the government using SIPPs when it is added up front and I”m an aggresive user of tax allowances and taking on legislative risk.
@Jed. Age at drawing pensions. Since 2010, It has gone, 50, 55, stated as 57 but not yet in legislation, then the DWP select committee suggested in April 2015 that it should be state pension age less 5 years, which would be 62+ dependent on age. So in the last 7 years, 12+ years has been added onto the suggested minimum age. If that is a trend line that continues, it really doesn’t matter what the tax rate is on withdrawal for anyone under 40 with a SIPP, since mortatilty via suggested minimum age for withdrawing benefits will deal with them before they become entitled to withdraw!
@Richard @Planting Acorns – At some level we monveator readers should be thankful large numbers of high earners don’t get personal finance at all. If they did and lots of people were doing what the likes of monevator readers do, the incentives to induce the behavioural aspects of saving and investing would be far, far less generous. ISAs are so generous because most of the accounts and value are in cash, whereas the power lies in investing in other asset classes for tax free compounding whilst the government doesn’t see this as lost revenue (unlike upfront tax relief on pensions). The marginal rate of relief on pensions will go, but it is a full 10 years since A-day revolution and the increase in the adoption of SIPPs. That in and of itself is quite remarkable in terms of how long the marginal rate of relief has lasted under such favourable conditions. Sure the taking the benefits part has been made SIPPs significantly more attractive for many, but I thought that was likely to be the case at some stage (I had probably a 25 year window from 55 to pick the time to take benefits under favourable conditions but it has come much earlier – possibly too early and the pendulum will swing back).
does a lifetime isa mean that with anytime you are made unemployed you will be expected to draw from this if its worth more than £6000 as per rules by dwp, as if its a pension then there safeguarded when you need a claim for any benefits.
am i wrong here,
Big drawback of the LISA (apologies for any sloppiness, on the phone):
You are locked in and vulnerable to the whims of a future government. Why would this this worse than a pension/isa?
Pension – you are locked in and they can hike the age you can get it but you are taxed on the exit which you’re relatively protected on.
LISA – you are locked in and they can hike the age you can get it, withdraw the bonus top up AND decide to tax you on exit. Nothing you can do about it as you are locked in (unless you pay the harsh cash out penalty).
ISA – you’re not locked in. Govt announces they will tax on exit. Say thanks for the ride and cash out. (Unlikely due to chaos it wold cause in the market (especially retrospectively)).
I can just about see the value of a LISA as a hedge on tinkering to SIPPs and ISAs. *tin hat time* I have so little faith politians not to tinker that I’m gonna pass and just fill up the pretty substantial ISA allowance.
Happy to be corrected by the wisdom of the Monevator crowd though!
@elef … Just a personal opinion but I don’t think the govt. will remove the tax free status of any product with the name ‘ISA’ in it… certainly not retrospectively.
They have other options for when they need to skin the goose :
– lower the bonus
-introduce a lifetime allowance
-lower yearly allowance
etc…
Where your explanation reads “Lifetime ISAs will be available from April 2017, so you’ll need to be 40 or younger at that time to open one.” Is this correct? I am hoping so, as I will be 40 years and 6 months old. I doubt this info is correct though, as I thought you had to be “under 40”, in which case I will have missed out. Could somebody please clarify this for me. Thanks in advance.
@Jason — Apologies, that was indeed inaccurate on my part, I guess in the heat of battle I was thinking “40 to the day” but the Treasury does seem to rule out *all* quartogenerians, however freshly minted. 🙁 I have corrected to “under 40” as per the Treasury’s detailed guidance so far.
Here is the specific section FYI (note it just says “from April”, but I’d bet it will mean from April 6th (start of the tax year):
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508176/Lifetime_ISA_final.pdf
What About the brexit impact? Hello im an EU citisen And Aš im used to live with Věry little money i started to do big savings also have some savings in my homecountry not yet avlb (May 2017) im really keen to buy the house And temporary rent the spáře room/s before settling the familly. But Aš im in UK for Just a year now i wonder what can happened with my savings in čase of brexit And whether its Worth to change my help to buy into lifetime isa? Thank you
@michaela — Congratulations on getting started with saving! I’m afraid though I can’t help you with your questions about Brexit, as I don’t know the rules for ISAs about what happens if you’re not a UK citizen and you hold one. (In fact I thought you had to be a UK citizen to open one, so if you’ve got a Help to Buy ISA then I guess I was wrong about that. 🙂 )
Personally I think the risk of Brexit is still fairly low (although increasing with every day) but I can see it must be a big worry for people like yourself trying to play for an unknown future. Good luck!
One factor that I don’t think has been mentioned yet, which is that LISAs make it even more clear that students should always take the maximum student loan that they are permitted.
If the student has, or their parents are willing to provide, cash that they could use to cover tuition fees or living costs, it is already the case that they would be better to hang on the cash, because doing so will almost certainly generate more benefit than the interest that they end up paying on the student loan (really a graduate tax). But now there’s an extra reason, which is that by taking the maximum loan they have more cash than they otherwise would have, so they are more likely to have cash to put into a LISA, and pick up a free £1000 pa from the government.
@TI To put money into an ISA you need to be UK resident. https://www.gov.uk/individual-savings-accounts/overview
(I presume this means tax resident.)
So non-resident UK citizens can’t put money into an ISA. But if you are going to be taxed in another country, an ISA wrapper isn’t much use anyway.
That’s a problem with all these tax wrappers: for anyone who might go and live overseas, they provide no tax shelter. In fact, this could be a serious impediment for someone who would like to move overseas if they have big investments in ISAs or UK pension wrappers. Their taxable income and gains might be a lot higher than they would have been in the UK.
I am considering paying a one off amount into an ISA this year. Would it be better to wait until next yeara nd pay this into a LISA so I get the 25% bonus?
Thanks.
Sorry to comment on this article 6 months after the last comment, however this article (as do many others on the web) reference a change in the age individuals can draw on a private pension from 55 to 57 starting in 2028. This would impact me and change my planning (specifically, increasing the percentage allocated to ISA vs Pension). However, I can’t find a single official reference (e.g. on gov.uk) to say that this change is actually going to happen. All I can see are some articles from 2014/15 that say it is proposed to happen, and then a few references in 2016 to it having happened on some articles that are really about other things. Can anyone clarify the current position?
Sorry, ignore my question, I found the answer in one of the other comments – great website by the way!
@TenMoreYears — Cheers!
Hmm – maybe you’re right and I should open one just in case? I’d mentally written it off after 1st glance, but experience tells me its unwise to ignore TIs advice
Reading TI comment no. 75 and then reading http://www.moneysavingexpert.com/savings/lifetime-ISAs
I think MSE has also made the error that TI highlights of other journalists, i.e. not considering tax on the way out of a pension?
Its definitely not a straightforward calculation for someone like me who is in the ‘pension’ rather than ‘1st time buyer’ bracket. But then again I don’t think its worth too much analysis as its only 4k.
Maybe broker table needs updating with where to get a good one?
I’ll do a bit of digging..
(Haven’t read all the comments so apologies if this is already discussed)
I’m intrigued by the Lifetime ISA for its pension possibilities.
I’m currently putting about 35% of my salary into my employer pension to avoid a load of higher rate tax, and i intend to continue doing that.
However before i started pumping my pension contributions, I invested in ISAs and have around 50K of shares in ISAs (all sitting in Halifax sharedealing attracting virtually no costs).
That money is sitting there in various cheap index trackers, with no real plans for its use other than its nice to have quite a few months salary on tap somewhere.
What i’m wondering is whether I should start selling 4K of shares per year out of Halifax and re-buy them inside a LISA, and get a 25% bonus on them. There’s a possibility I’ll need to sell and then take the 6.25% hit, but most likely i won’t need to so I think the risk is fairly low.
Am I missing something or would this be a fairly easy way to juice up my existing ISA holdings over the next 12 years or so?
Lifetime ISAs have a huge (potential) problem that you haven’t mentioned.
Pensions are not considered if you need to be income assessed (for example for a benefits application) or taken into account in the event of insolvency.
Lifetime ISAs are taken into account as assets for income assessment in the case of a benefit application, or in the event of insolvency.
For example, you are in your twenties and you lose your job for whatever reason. Annoying. So, you submit a claim for Universal Credit / Council Tax reduction / Housing Benefit / NHS Help with heath costs etc. If you have over £6000 of assets your benefit is reduced, and no award is made at all if you have over around £15000.
With a normal ISA, this is not a big deal as you can withdraw the cash to live on, with a Lifetime ISA you are obliged to use the cash to live on and take the 25% (including the additional 6.25% penalty) until you fall below the asset cap.
As people under 40 are much more likely not to have a career with one employer for life, and even be on lots of fixed term contracts (and the like) needing to claim benefits at some point in your life is pretty much guaranteed. If you have a Lifetime ISA you won’t even be able to get free dental care and a council tax discount in the event of unemployment without paying the penalty fee.
It’s important to note that the house you live in is excluded from any benefit calculation if you own it, so you are left in the ridiculous situation where if you have managed to get a mortgage with your LISA funds before losing your job you can claim mortgage interest payment benefit from the government, along with everything else even up to travel costs to get to medical appointments, but if you haven’t saved up enough for a deposit yet or are still looking to buy you have to lose your deposit savings and pay the penalty to boot.
If you are saving for a first house, a LISA is a possibility if you understand the pitfalls. If you are saving for retirement a pension is much better in most cases as (although a basic rate taxpayer gets 5% less tax relief) the protections offered are much more valuable.
I agree that the access to benefits point is important. It’s the most off-putting thing about the penalty. A 20 year old takes out a LISA now, confidently setting out on a promising career, and saves diligently… in her mid-40s, she gets a chronic, but not terminal, illness meaning she can no longer work… and faces a massive penalty on her LISA savings. If it’s being used as a quasi-pension, the same protection as applies to pensions should apply in this case.
Ivanopinion also makes a good point about moving abroad. Lots of people these days spend part of their working life abroad. Other tax jurisdictions may well want to tax money in a LISA, presumably, could that force people into early withdrawal?
If they’d just take these sort of concerns on board…
I know that in Australia interest and earnings on holdings in UK Pensions aren’t taxed but they are in an ISA which makes keeping an ISA pointless when moving there. I imagine they would also tax LISAs as Haphazard said. Might be the case when moving to multiple countries.
Hi first off I wanted to say I have been reading your site for years and have learned a little, I invested for a few years but withdrew the lot to buy my dream property when the housing market in my area had collapsed. I work in property so was confident of timing the market for that one. Now more or less mortgage free I am starting my investment journey again to supplement a 15 years worth of final salary type pension available at sixty and an accumulating career average pension which won’t be available until at least 68. Ideally I would like to retire at around 60 so wanted to build up an ISA pot to cover those 8 years and the lisa looks like a good way to help and I also like free money. Further pension contributions not really an option as I have worked out there will be too much tax on the way out. Anyway enough rambling my question is what do the very knowledgable authors and readers think about using the vanguard target retirement 2040 in the lisa to help with this? I am happy to take some risk with this as at worst I keep working.
Any thoughts greatly appreciated.
Looks like HL, Nutmeg and Share Centre are currently the only providers (http://www.express.co.uk/finance/personalfinance/789270/Lifetime-ISA-providers-bank-offers-individual-saving-account)
HL and Nutmeg are very similarly priced, ad valorem at 0.45%, i.e. expensive. Can’t find share centre costs but its likely to be fixed fee, whether it will be ISA level charges or SIPP level charges I don’t know.. Fixed fee unlikely to make much sense as you can only contribute 4k per annum so it would take a while before it gets economical.
So a 0.25% ish ad valorem needs to turn up ideally
That said, I may have shot myself in the bollock, as I have already maxed out my ISA and I turn 40 this year. That probably means I can’t open one even if I want to? The Lifetime ISA 4k allowance is carved out of the standard ISA 20k allowance right?
I don’t think I’ll cry myself to sleep over it. It seems complicated and very poorly thought out (in the standard conservative govt mould), but granted for a BRTpayer it would seem to be tax free on way in as well as way out which isn’t to be sniffed at (as TI says its effectively free money) but for some the normal pension route may be freer still depending on myriad circumstances. But you have to be happy to wait an age to get it (i’m talking about the pension perspective only here – I haven’t bothered thinking about the 1TB perspective)
Consider someone who’s reached a high salary quite young, is now limited to a £10k p.a. pension contribution and is conscious of having ignored pensions during his rapid rise. Or, alternatively, has contributed quite a bit in the past and is becoming aware of the LTA.
Being able to put £5k gross p.a. into a LISA effectively raises his pension contribution by 50%, leaves his LTA undisturbed, and carries the promise of a little chunk of untaxed income later in life.
How many such people there are, and whether they’d bother with trifling £5k p.a., I could not say.
I think 10k annual allowance implies 210k income so as you say the LISA is neither here nor there in that circumstance
@The Rhino
The Share Centre charges £57.60 for its ISA, so probably the same for its LISA. But 1% dealing fee, which is ridiculous.
HL’s 0.45% is £18 on a £4000 ISA (and I assume the same for a LISA), so not bad for now. In year 3, it would be £54 (plus or minus any growth in the portfolio), but at that point you could switch to ETFs and the fee is capped at £45, which again isn’t bad. Or you could transfer to another LISA provider (who might well refund any exit charges from HL).
@Rhino – Youinvest say they are going to open one up later this year, but when I have spoken to them they cannot say when. I turn 40 in June so I opened mine with HL, but I’ll be moving it once a cheaper option becomes available…
@IO – that sounds like a reasonable assumption for share centre, and you’re right, it makes no sense. HL is the obvious choice for now, that said, nutmeg claims to have no exit charges..
I’m just in the process of terminating my HL account – I really have timed this quite badly – Its not like I can claim not to have known, just wasn’t concentrating hard enough
I.e. in a completely unnecessary mad-dash I’ve burned up the whole ISA allowance in my last eligible year for LISA membership whilst at the same time closing my account with the only provider worth holding a LISA with..
Only time will tell whether it was fate on my side guiding me away from a govt shaft, but more likely I’ve just tossed 10k in the bin..
@rhino – why not try halting your transfer from HL and see if it’s possible to do a partial transfer from your ISA into the LISA? Worth at least talking to HL about it, see if their legendary customer service is worth it – and what have you got to lose? (Well, that’s easy – £10k plus!)
@VF HL transfer is a SIPP not an ISA, thats all I had left with them
I’m pretty sanguine to be honest, I don’t really want one. They fail my Occams Razor test.
I’m hoping the next TI article will outline how they’re terribly unsuited to me anyway 😉
@TheRhino – Yes. 20K max across all ISAs. You might be able to withdraw up to £4,000 from an ISA to repatriate to LISA in the same tax year. This does not need to be a direct transfer but using the flexibility they introduced to avoid the delays on ISA to ISA transfers. If you are a client I would give HL a call – they are excellent at providing written answers to this sort of thing from an in house expert and often have direct access to the expert at HMRC.
I would only do this if the ISA and the LISA were with the same provider and they were happy to accept it. All ISA managers report subscriptions via National Insurance number so you need to be certain that they will only report £20K and not £24K.
@All – The biggest drawback I can think of with a LISA is that gains are likely to be taxed as an ISA in any foreign jurisdiction, rather than as a pension which is what the product purports to be if not used for a first time house purchase. That could see someone having to make a penalty withdrawal to settle the tax due with no certainty that an exit penalty would be included in a double taxation treaty calculation. You can mitigate a little with trackers – no need to crystalise while overseas – but there is always a risk the index provider could force a crystalisation event if they delist the security.
If you’ve used up this years ISA subscription you can’t do a partial transfer to the LISA. You can only transfer the full balance you’ve put in this year. So if you’ve put in £20k already you can’t transfer £20k into a LISA so it’s not possible.
For me the LISA is excellent as I’m an FTB and also self employed so no employer pension contributions. The LISA is therefore pretty much tailor made for me.
I actually think it’s pretty good for everyone for one reason: The government can’t stop meddling with pensions. Who’s to say in the future salary sacrifice won’t be restricted? Tax relief reduced or annual contribution allowance reduced? You’ll probably be glad that you opened a LISA.
It’s also worth noting that the government can spring a positive surprise. Who’s to say they won’t scrap the LISA withdrawal penalty in the future or increase the ‘free money’. Or make it better in some way.
When I opened the HTB ISA it was pointless because of the £200 monthly pay in limit and the restriction to buy a house for up to £250k. I only opened it because I was trying to build up cash and had maxed out high interest bank accounts and reg savers. Well now I’ve got £4k in it earning 3.5% net interest and can transfer it to a LISA without using up the £4k allowance and have the flexibility of now putting it in equities and can also use it to buy a house for up to £450k. So sometimes products can change significantly for the better.
My plan is to wait and see. There’s time to use this year’s LISA allowance until April 2018. I’m looking forward for the follow-up article.
Yes, for anyone who is likely to go to live abroad at some point, it is worth bearing in mind that a LISA is unlikely to have any overseas tax protection. The 25% top ups from the government that have already been received will not be affected, but the country where you are tax resident will almost certainly disregard the LISA tax wrapper, so any income or realised gains on the underlying portfolio will almost certainly be taxable at local rates.
It is even possible that some countries will tax you on unrealised gains, for instance by taxing the change in market value of the investments, each year. It depends on the law in that country.
Then again, the same is true of ISAs, though at least there’s no penalty for cashing them in, if the foreign tax treatment is penal.
AFAIK, pensions aren’t always better in this respect. For instance, the 25% withdrawal might be tax free in the UK, but could be taxable overseas. And again, some countries might tax underlying income and gains on the portfolio, because generally the tax treaty with the UK will allow the country of residence to tax this.
Going to live abroad can be a tax minefield. For instance, in New Zealand, if you have borrowings denominated in sterling (for instance on a mortgage on a house in the UK that you are renting out), they will tax you on any unrealised exchange gains, from a NZ$ perspective. eg, say your mortgage is £300k when you arrive in NZ and £1=NZ$3, so that’s NZ$900k, and assume the pound then weakens to NZ$2, so your mortgage has “fallen” to NZ$600k, so they would tax you on your NZ$300k unrealised gain, even though your mortgage is unchanged in GBP terms.
@ivanopinion – you can only open a LISA if you’re a UK tax resident. That would make you a non-dom in NZ, so (to the extent that the rules haven’t changed in the last 10 years) you’d only pay NZ tax on your NZ income. If you later change your tax residency from UK to NZ (e.g. if you move there permanently), then from that point onwards your global income will be taxed in NZ, including investment income (however assessed) on any ISAs, LISAs, property – everything. In my experience, country hopping – especially sans a clear plan of where you’re going to spend your old age – is an expensive hobby. In more ways than one.
Iro the permanent move, I knew a guy who had permanent residency in Australia (broadly equivalent to the UK’s indefinite leave to remain), but somehow managed to retain a non-dom status for tax, which is not a usual thing in that country. My point here is, there may be options, and getting advice from a decent tax lawyer who deals with international relocations is well worth the fee.
@all — Thanks for the very interesting comments. Yes, I’ve a mention (a nod, really) to both the benefits differences with respect to pensions and the overseas complications of LISAs (/ISAs) versus pensions in the draft of part two (which I hope to publish Tuesday) but I’m not going to be able to go into mega-depth. The whole thing is complicated enough as it is. (I think the draft is 2,000 words or similar). Perhaps I could do that in a part 3 roundup!? 😉 Or perhaps I’ll simply link to this very decent set of insights in this thread. 🙂
Regarding waiting to open a LISA, I’d agree no rush UNLESS you are itching to buy a house in the next 12-18 months and the LISA will be part of that. You can’t use the LISA bonus in an account that isn’t at least 12 months old to buy a house, so you’d want to start that clock ticking ASAP in that case. Again, I’d just open one today with £100 and then have a ponder on long summery walks. The first year government bonus won’t be paid in until April next year, so in that sense there really is no rush.
@hosimpson
I was only talking about moving overseas with an existing LISA/ISA/UK pension.
I don’t think domicile is relevant for NZ tax, as they just go by residence. But I didn’t mean to divert this into a discussion of NZ tax. My main point, with which I think you agree, was that other countries won’t respect ISA or LISA tax wrappers and some of them might not respect UK pension wrappers either.
LISA’s look interesting, but it’s worth noting that money held in a LISA is treated like normal savings when it comes to means and capital testing. The money is not ring-fenced like a pension (SIPP) so if you hit hard times in the future you would be expected to draw on your LISA (and other savings) before enjoying full benefits from the state or local gov.
For the me the 450k cap has put me off living in London. A 2 bed new build is very close to the 450k mark. Surely there will have to be some flexibility down the line?
Interesting article and discussions about the LISA. Just to add my two pence, I opened LISA for myself and my wife on day one of the new tax year with HL ， My thinking was simple, with the £ 1000 bonus, the amount I can put into ISA/LISA would be £21000 per person per year. this will speed up the process of building up my pot for FIRE. I am affected by the £10000 pension annual allowance. so the introduction of LISA is a good bonus for me.
Is the pension angle on this really that good? I’ve maxed out my HTB ISA but as a house purchase is pretty likely in the next 12months I wasn’t going to bother with the Lifetime ISA. This article has actually changed my mind unless I’m totally missing the point? I wish a house purchase was longer than 12months away, especially as I’ll be footing the bill solely but alas I’m hoping we don’t get stung too badly
Nick,
You should read the guide over at MoneySavingExpert (http://www.moneysavingexpert.com/savings/lifetime-ISAs). However, you should know that:
-You must have had a LISA open for a year to get the first-time buyers’ bonus, anyone with even an inkling of being a first-time buyer should open a LISA as soon as possible, with the bare minimum (can be just £1) just to get the clock ticking – in case you want to add to it later.
The main differences between a Help to Buy ISA and a LISA are:
-The Help to Buy ISA was launched in December 2015, and like the LISA, it has a 25% bonus that’s added to what you save, if you use it towards a first home.
-You can have a Help to Buy ISA and a LISA.
However, you can only use the bonus from one of them towards buying a home.
Use the LISA for the 25% bonus to buy a home and you won’t get the bonus with the Help to Buy ISA, but you can still keep and use the money plus the interest.
Use the Help to Buy ISA for the 25% bonus and you’d have to pay a penalty to use your LISA savings for a property. Though you’d still be able to use it and get the bonus for retirement savings.
You can transfer a Help to Buy ISA into a LISA by 6 April 2018 and you get the bonus on ALL of it.
The LISA allows you to withdraw everything tax free at 60 and I believe you can pay into SIPPs until you are 75 (please correct me if I’m wrong). So does that mean you could put £800 into a LISA to get £200 top up for a balance of £1000, then withdraw at 60 and put into SIPP to get a further topup of £250 to get £1250?
Thanks @Alex,
I’ve read the MSE page in the past, I didn’t appreciate I could actually hold both, I thought even holding them was mutually exclusive rather than application of the bonus, very interesting.
I’m curious, can I hold multiple S&S ISAs in the same tax year? I didn’t think this was possible so if I open a Lifetime ISA I won’t be able to dump the remainder in index funds through iWeb again?
You can only contribute to one S&S ISA per year. But a LISA is not a S&S ISA, even if it is invested in S&S. So you can contribute to both (subject to the overall £20k limit).
@ivanopinion thank you for the clarification, I hadn’t found clear answers myself and was a bit concerned!
Sorry for the dim Q but I’ve been unable to find the follow-up post mentioned in the last para: “In the next post we’ll see exactly who the Lifetime ISA might be good for, and who should say “no thanks”, and back away slowly.” – grateful if anyone can point me in the right direction.
@IanH — I half wrote it and never finished it. Hopefully soon!
@TI Ha! Gotcha! – thanks for following up though – I guess the comments here cover most of wrinkles in the LISA provision anyway.
I see Skipton are planning to offer a princely 0.5% on their cash LISA….
I own a house but recently got married and my husband hasn’t bought a house before. Would he be able to benefit from the LISA if he decided to buy a house in the future or would he be treated as a non first time buyer given that he is married to someone who owns a house?
Hey Watermelon,
As long as he has *never* owned *any* part of any property *anywhere in the world* he is eligible to use the LISA to buy part of a house. That he is buying one with someone who already owns a house is of no consequence. Though note that:
– He has to have it open for over 12 months before he can use it to buy a house (he can have £1 in it for that time, it just has to be open)
– He has to get a mortgage; no buying outright.
Full details are explained at http://www.moneysavingexpert.com/savings/lifetime-ISAs#buyingaproperty
Ajbell youinvest has launched their lisa isa. The fees are cheaper than hl.co.uk
https://www.youinvest.co.uk/lifetime-isa/charges-and-rates
@Eagleuk,
Good spot.
@TI/TA, Now that it looks like multiple providers are going to be launching their LISA offerings, would it be worthwhile adding Lifetime ISA charges and availability to your excellent broker comparison page at the next major update?
I know that slitting your wrists looks attractive compared to adding more work to that document, but it would be really useful.
🙂
Yes, cheers for sharing the update here @Eagleuk!
I have an unfinished 3,000 word draft on my follow-up to the Lifetime ISA post that is turgid and convoluted. Mostly my fault but also the fault of this confused product. There probably is a case for adding Lifetime ISA information to the broker table, and I’ll discuss it with @TA, but I fear I know his answer. And to be fair we’re still only talking 3-4 providers, it’s nothing like universal.
I would guess that in most cases, the LISA charges will be the same as ISA. So, you could just deal with the few exceptions by way of footnotes.
@ivanopinion, I wouldn’t assume charges will be as per ISA. It’s a rather different beast, with a lot more restriction on withdrawals and penalties etc. I guess charges will be more in line with SIPPs than ISAs.
I think the fact that hardly any providers have started offering them (as well as TIs difficulties in producing a concise readable summary!) suggests they are going to be rather complicated….can’t see them disappearing as govnt have rather bigger issues to deal with at the moment, but suspect they might not be a massive success either.
@Vanguardfan
You may be right, although HL and AJB seem to have the same charges for LISAs and ISAs. (AJB is cheaper for ISAs with funds worth more than £250k, but as the maximum investment in a LISA is £4k per year, in practice LISAs will not get close to £250k for decades.)
@Monevator, did you get a chance to finish your follow-up article about LISA yet? I can’t find a link to it. Would be great if you post a link to a follow-up article here, if you managed to finish it 🙂
@HitOdessit — Sadly I didn’t. In fact, not doing so has become sort of a roadblock to producing content all year! (My problem not yours. 🙂 ) It basically induced a bit of burnout… Still hope to get back to it, will post here when I do.
Good luck with that The Investor. I opened one, just in time – I think there were three of us and a tin of spaghetti…wondering what will become of it all….
Hi there, just wondering 2 years later how people had been getting on with the Lifetime ISA? With the tax year coming to an end soon have most of you already hit the limit? Thanks, Ben