Tony Wickenden: Getting to know the newest member of the Isa family

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This year’s Budget announced the proposed introduction of the Lifetime Isa from April 2017. But the idea was first floated back in 2014, when Centre for Policy Studies research fellow Michael Johnson opined in a paper that government incentivised saving for retirement should be founded on workplace and lifetime Isas. These would be two Isa cells within a proposed warehouse of “specific purpose” Isas.

Broadly speaking, the Lifetime Isa will enable those under the age of 40 to save up to £4,000 in each tax year, with the added benefit of the government providing a 25 per cent bonus on the contributions paid throughout at the end of that tax year. This means that where the maximum saving of £4,000 has been made, the government bonus will equate to £1,000. There will be no monthly cap on contribution amounts but the bonus will be capped at £1,000. This is equivalent to basic rate relief but, importantly, is characterised in money terms rather than tax relief.

Savers will be able to make Lifetime Isa contributions and receive the Government bonus from the age of 18 up to the age of 50. With this in mind, someone who opens an account aged 18 will effectively be able to secure lifetime savings of up to £160,000 (that is, £128,000 saved by them and £32,000 as government bonuses). Permitted contributions can continue at age 50 but there will be no government bonus payable on them.

Opening a Lifetime Isa will be almost identical to opening a standard Isa. Provider will apply their normal account opening process, which would generally include asking for the appropriate identity documents that prove the saver’s date of birth, National Insurance number, proof of address and so on. It will be possible for savers to open more than one Lifetime Isa in their lifetime but they will only be able to pay into one in a tax year, aligning the rules with the standard Isa.

The aim of the Lifetime Isa appears to be twofold: it is intended savers will either use the funds to buy a property for the first time or to provide an alternative or additional retirement fund to be accessed without penalty after age 60.

Tax-free funds, including the Government bonus, can be used to buy a first home worth up to £450,000 at any time from 12 months after opening the account. If the house is being bought with someone else, both purchasers can use a Lifetime Isa and each benefit from the government bonus. The rules are based on the rules applicable to the Help to Buy Isa, so the withdrawal must be paid directly to the conveyancer.

In other cases, while money can be withdrawn at any time, if it is done so before the investor turns 60, the Government bonus (together with any interest and growth on the bonus) will be lost and, in addition, a charge equal to 5 per cent of the remainder will be payable. This has been viewed as pretty penal and there are strong sector representations to change this.

From age 60, full or partial withdrawals can be made and can be paid penalty- and tax-free. If funds remain invested, any interest and investment growth will be tax-free. There are exceptional circumstances in which it will be possible to make withdrawals earlier, for example, terminal ill health, the definition of which will align with that used for pensions.

For inheritance tax purposes, the Lifetime Isa will have the same treatment as other Isas. Therefore, on the saver’s death (aside from any of the funds invested in business property relief qualifying-Aim stocks) the funds will form part of the deceased’s estate for IHT purposes. If, however, the Lifetime Isa is owned by somebody with a surviving spouse/civil partner, that surviving spouse/civil partner will also inherit the Lifetime Isa tax advantages and will be able to invest as much into their own Lifetime Isa as the value of the deceased spouses’ on top of their usual allowance.

Finally, however, it is important to note that any contributions to a Lifetime Isa will count towards the overall increased £20,000 Isa contribution limit from April.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn

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