A flagship new savings ISA was announced in the Budget giving younger savers a 25% tax-free boost from the Government. Here’s the lowdown on how it works.
UPDATED 19 SEPTEMBER 2016
A new ‘Lifetime ISA’ will be introduced from April 2017, offering a tax-free boost of up to £1,000 a year towards buying your first home or saving towards retirement.
Savers up to age 40 can open these accounts and slot away a maximum £4,000 each year, Osborne announced in his Budget today. The Government will then boost returns by 25p for every £1 saved.
The bonus will be paid into the account annually for the first year, and then monthly from April 2018. And it will be based on contributions, not on the value. That means you'll receive a £1,000 bonus on a £4,000 contribution to a stocks and shares Lifetime ISA, regardless of whether the value has risen or fallen in the meantime.
What’s the maximum Government bonus worth?
Savers are able to make contributions to a Lifetime ISA from age 18 to 50. Given maximum total contributions over this period amount to £128,000, the most you can receive from the Government bonus is £32,000.
However, returns aren’t all about the bonus – you’ll also get investment or interest paid on the account over the period, further boosting returns. Banks, building societies and investment managers will offer Lifetime ISAs so you’ll be able to compare deals when providers start launching accounts.
"...You can use the money saved as a deposit on a property up to a value of £450,000, provided you are a first-time buyer and not investing in buy-to-let."
How much can pay in each month?
You can save as much or as little as you like each month, so long as you don’t exceed the annual limit on the account of £4,000.
How do I put this towards my deposit?
While you can start paying in from the word go, you’ll have to wait 12 months after opening a Lifetime ISA before any money in the account can be put towards buying a property.
You can then use this money as a deposit on a property up to a value of £450,000 across the UK, provided you are a first-time buyer and not investing in buy-to-let.
Unlike the Help to Buy ISA, you can put the savings and bonus towards the deposit required to exchange contracts.
I already have a Help to Buy ISA – is it worth the bother?
If you are already saving into a Help to Buy ISA – another Government account which launched in December last year, you can transfer these savings into a Lifetime ISA from 2017 to simplify your finances. Alternatively, you can continue saving into each account separately. However, you’ll only be able to put the bonus from ONE of the accounts towards buying a property.
The Lifetime ISA is one in a line of new savings schemes announced over recent months. The Help to Save scheme gives low-paid works a bonus of up to £1,200 to kick-start their savings pot.
What about using it as a pension pot?
If you already own a property so have no need to save towards a deposit, you can keep any cash saved in a Lifetime ISA until age 60 to put towards your retirement income. At this age, you can take all the savings tax-free. Or you can withdraw tax-free income from your fund.
What if I want to use the money for something else?
Rules allow you to withdraw the cash before age 60. However, you’ll lose the government bonus – including any interest and growth on it – and you’ll pay a 5% charge on the entire fund to boot.
Why has the new ISA been introduced?
Radical new rules giving retirees greater access to their pension pots were introduced in last year’s Budget. The new ISA is meant to offer a flexible savings option for the younger generation, said Osborne, who face the twin challenges of saving to buy and towards retirement. The Lifetime ISA is an incentive to save for a first home and retirement.
What if I have other ISA accounts?
At present, you can pay in up to £15,240 a year into your ISA – but Osborne announced this allowance would jump to £20,000 from April 2017. The sum can be split between different ISA accounts, whether cash, stocks and shares, or the new Lifetime ISA.
Are you likely to open a Lifetime ISA? Let us know in the comments below...