Is the Lifetime ISA as good as it sounds?

The chancellor has just delivered his eighth Budget, and the big news is the introduction of the Lifetime ISA. Now, for the first time, there is an ISA that can be used to purchase a property and save for retirement, with a generous 25% top-up from the government. But the devil is in the detail…

How the Lifetime ISA could benefit you

The principle appears to be pretty simple: for every £4 you save, the government will give you £1. There is an annual limit of £4,000, and if you saved that much the government would top it up to £5,000.

The amount of money that can be contributed to an ISA each tax year is increasing to a cumulative £20,000 in 2017, so if you pay £4,000 into it, you can only put £16,000 into other ISAs.

It is separate to a cash ISA and stocks and shares ISA, so you can contribute to all three in the same tax year. As with existing ISAs, contributions are made from taxed income and withdrawals are tax free. Available to anyone between the ages of 18 and 40, it is portrayed as a way to “help young people save flexibly for the long-term throughout their lives.”

The Lifetime ISA has two purposes: it can be used to purchase a first home (Help to Buy ISAs can be merged into the Lifetime ISA) and for retirement.

The fine print

The government top-up only happens until the owner reaches the age of 50, and withdrawals can be made tax-free from the age of 60. If you want to withdraw money before the age of 60 for any reason other than purchasing your first home, you will pay the government back its top-up and an additional 5%. There is also a minimum of 12 months from when the ISA is opened to when withdrawals can be made with the government top-up.

By comparison, a pension has no age limit on when contributions can be made or receive tax relief – even children are eligible – and money can be released from the age of 55. Untouched pensions also sit outside of a person’s estate so are exempt from inheritance tax, but ISAs are not.

The top-up is paid as a lump sum at the end of the tax year, not in monthly instalments. The government is also going to work with the industry to decide how people can save additional funds – this could include still paying in beyond the age of 50, for example. There may also be further events that enable the account holder to withdraw the money without sacrificing the bonus.

Finally, the money can be withdrawn in full if a person is terminally ill, regardless of their age.

The bottom line

As it isn’t competing with pensions, the Lifetime ISA is a welcome addition that could incentivise more people to save, especially as it allows flexibility but also encourages people to leave the money alone for the long term.

Although stated to be a product to help the young, it could also be popular with the better off, as the government top-up is a generous bonus that does not apply to cash or stocks and shares ISAs.

Further details are expected in the autumn, but until then, this could be a home run for the chancellor if enough people see value in it.

Add new comment

Call 0800 304 7288 for a friendly chat about your pension

Important Information

Tax treatment depends on your individual circumstances and may be subject to change in the future.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

We are really looking forward to reading your comments. Before you start writing, please just remember that everything you write will be displayed publically – including your name. Not sure what sort of thing you can write, and what sort of things you should avoid? Please have a quick read of our social rules for guidance.

Back to top