The highly-anticipated Lifetime ISA will be introduced this week (06 April 2017), offering pension savers and first-time buyers a generous cash bonus at the end of each year. This is what you need to know.
What does it do?
Each year, an individual can save up to £4,000 into a Lifetime ISA (or LISA). The Government will add a 25 per cent top up to whatever you deposited. So a saver who deposited the maximum £4,000 will receive a top-up of £1,000.
The bonus is paid annually in the tax year 2017/18 (then monthly from April 2018) all the way up until the account holder turns 50 years of age.
Once the LISA has been held for 12 months, it can be used to purchase a first home under £450,000. Or wait until you turn 60 and use it towards your pension. Or both. It’s your choice.
Who can get one?
LISAs are available to anyone aged 18 years or older. This means an individual can deposit a maximum of £128,000 in their lifetime, while the Government will top up a maximum of £32,000.
However, if you reach 40 on or before 6 April 2017, you won’t be able to open a LISA.
What’s the catch?
The LISA is aimed exclusively at first-time buyers and pension savers. If you withdraw cash for anything else, you’ll be hit with a 25 per cent charge. This effectively drains the bonus and adds an extra charge of 6.25 per cent on top.
Example: You’ve deposited £1,000 into a LISA. You’ve earned a Government top-up of £250. The next day your roof has fallen through and you need to withdraw the lot. A 25 per cent charge of £1,250 is £312.50. This leaves you with a grand total of £937.50 – a whole £62.50 less than when you started.
And depending on whether you’re a full-time or self-employed saver, it may be more beneficial to save through your workplace pension.