The lifetime ISA - announced by Chancellor George Osborne in today's budget - will allow those between 18-40 to open an account and save up to £4,000 a year until age 50.
Contributions into the Lifetime ISA will receive a government bonus of 25% - up to £1,000 a year.
The savings and bonus can be used towards a deposit on a first home worth up to £450,000 across the country.
Accounts are limited to one per person rather than one per home - so two first time buyers can both receive a bonus when buying together.
If an individual has a Help to Buy ISA they can transfer those savings into the Lifetime ISA in 2017, or continue saving into both - but they will only be able to use the bonus from one to buy a house
Individuals will be allowed to withdraw the savings at any time before they turn 60 for any other purpose but will lose the government bonus (and any interest or growth on the government bonus) and will also have to pay a 5% charge on the remainder.
After an individual reaches 60 they can take out all the savings tax-free.
Lifetime ISAs in detail
Opening a Lifetime ISA
The Lifetime ISA will be available from April 2017. Individuals will be able to open a Lifetime ISA from the age of 18 until they turn 40.
Opening a Lifetime ISA will, in most ways, be identical to opening a regular ISA under the existing rules. An ISA manager (such as a bank, building society or investment manager) will apply their normal account opening processes which include asking for a National Insurance number and date of birth. Individuals will be able to open more than one Lifetime ISA during their lives, but will only be able to pay into one Lifetime ISA in each tax year.
Saving into a Lifetime ISA
Saving into a Lifetime ISA will also be very similar to saving into any other ISA. For example, contributions will be made with the individual's own cash. Qualifying investments in a Lifetime ISA will be the same as for a cash or stocks and shares ISA. Individuals will be able to transfer their Lifetime ISA within 30 days between providers to get the best deal, in line with the existing ISA rules. 1.8 There will, however, be a few additional rules:
- Any contributions to a Lifetime ISA will sit within the overall £20,000 ISA contribution limit
- The government bonus will be paid on contributions of up to £4,000 per tax year. There will be no monthly contribution limit
- Individuals will be able to contribute to their Lifetime ISA and will receive a government bonus on contributions up until the point they reach 50
- Individuals will be able to transfer savings from other ISAs as one way of funding their Lifetime ISA. In line with existing rules, transfers from previous years' ISA contributions do not affect that year's £20,000 overall ISA limit. During 2017-18 only, additional transfers may be made and matched from the Help to Buy ISA
The government says it wants it to be as easy as possible for individuals to save additional funds on top of those receiving a bonus (for example, if they want to contribute more than £4,000 a year or keep contributing after age 50) and will explore with the industry the best way to achieve that.
Savers will be able to contribute to one Lifetime ISA in each tax year, as well as a cash ISA, a stocks and shares ISA, and an Innovative Finance ISA, within the new overall ISA limit of £20,000 from April 2017.
The government bonus
The government will provide a bonus of 25% on contributions made during the year at the end of the tax year. This means that if an individual has made contributions of £4,000 into their Lifetime ISA by 5 April 2018, the government bonus will be £1,000.
The bonus will be paid into the Lifetime ISA at the end of each tax year, so that savers will also benefit from tax-free growth on the bonus from the time it is added. For example, a £4,000 contribution made by a 25 year old into a Lifetime ISA which grew at 4% a year would be nearly five times larger due to the government bonus and investment growth by the time they reach 60.
Lifetime ISA managers will claim the bonus due on the accounts they manage from HMRC who will pay valid bonus claims (up to a maximum of £1,000 per person per tax year). Where the individual is purchasing a home having contributed in that same tax year, they will be able to receive their bonus in-year (i.e. they will not have to wait until the following tax year to receive the bonus).
Using the government bonus to purchase your first home
Where people choose to withdraw savings from the Lifetime ISA to make a first home purchase:
- They will be able to withdraw up to 100% of their Lifetime ISA balance, including the government bonus. They will get the benefit from compound growth because the government bonus is paid each year
- Their withdrawal can only be put towards a first home located in the UK with a purchase value of up to £450,000
- There will be an initial minimum holding period of 12 months from account opening before withdrawals that include the government bonus can be made for a home purchase
- If they are buying their first home with someone else they can each use a Lifetime ISA and each benefit from their government bonus
- The detailed rules will be based on those for the Help to Buy: ISA, including that the withdrawal must be for a deposit on a property for the first time buyer to live in as their only residence and not buy-to-let
- They will inform their ISA manager of the purchase, who will claim any additional bonus due from HMRC, and the withdrawal will then be paid direct to the conveyancer. If a purchase falls through after a withdrawal has been made then the funds will be returned to the same ISA manager by the conveyancer and will not count against the annual contribution limit
Interaction with the Help to Buy ISA
The Help to Buy: ISA will be open for new savers until 30 November 2019, and open to new contributions until 2029. Savers will be able to save into both a Help to Buy: ISA and a Lifetime ISA, but will only be able to use the government bonus from one of their accounts to buy their first home.
For example, if an individual holds a Help to Buy: ISA and a Lifetime ISA they may:
- Use their Help to Buy: ISA with its government bonus to purchase their first home, and save their Lifetime ISA with its government bonus for retirement
- Use their Lifetime ISA with its government bonus to purchase their first home, and withdraw the funds held in their Help to Buy: ISA to put towards this purchase without the government bonus
- Use their Help to Buy: ISA, including its government bonus, to purchase their first home and withdraw funds from their Lifetime ISA to put towards the purchase. In this instance the government bonus on the Lifetime ISA savings would be returned to government and the individual would be required to pay a charge, as set out below in paragraph 1.21 4 1.16
During the 2017-18 tax year only, those who already have a Help to Buy ISA will be able to transfer these funds into a Lifetime ISA and receive the government bonus on those savings. Any Help to Buy ISA funds that were saved prior to the introduction of the Lifetime ISA on 6 April 2017 will not count towards the Lifetime ISA annual contribution limit. Contributions made after this point to the Help to Buy ISA and transferred across will count against the annual contribution limit. At the end of the tax year they will receive a bonus on the full amount of the transferred Help to Buy ISA and their Lifetime ISA contributions. In line with the normal Lifetime ISA rules, Help to Buy: ISA savers will be able to purchase a first home with the government bonus 12 months from the date of opening their Lifetime ISA.
Full or partial withdrawals can be made from age 60. The withdrawal (including the bonus) can be used for any purpose, and will be paid free of tax. Funds can remain invested and any interest and investment growth will be tax-free.
Other circumstances for full withdrawal
Where people are diagnosed with terminal ill health, they will be able to withdraw all of the funds (including the bonus) tax-free, regardless of the individual's age. The definition of terminal ill health will be based on that used for pensions.
The Lifetime ISA will have the same inheritance tax treatment as all ISAs. Upon the death of the account holder, the funds will form part of the estate for inheritance tax purposes. Their spouse or civil partner can also inherit their ISA tax advantages and will be able to invest as much into their own ISA as their spouse used to have, on top of their usual allowance.
The government will also explore whether savers should be able to access contributions and the government bonus for other specific life events.
The British Medical Association (BMA) has warned chancellor Philip Hammond to reform the NHS pension scheme rules or doctors will reduce their working hours.
The lifetime allowance should be scrapped and replaced with a lower annual allowance, last week's Pensions Buzz respondents said.
Action for Children Pension Fund has outsourced its pensions administration to Trafalgar House.