LISA: A New Type Of Saving Product
The Chancellor unveiled plans to introduce a new Lifetime ISA (LISA) from April 2017. But this is a complimentary savings scheme for younger savers, not a replacement for traditional pension saving. Higher rate tax payers will continue to enjoy tax relief at 40% on pension savings of up to £40,000 a year, keeping pensions as their number one long term savings plan. Indeed, the under 40s will be able to use both and add up to £45,000 pa to their retirement funds.
The Government aims to encourage long term saving with the inclusion of a ‘buy four get one free’ bonus, but with the ability for first time buyers to use savings to get a foothold on the property ladder.
How it works on the way in
The new LISA will only be available to the under 40s and will include a 25% Government top-up at the end of each tax year. It won’t be possible to pay as much into the LISA as you can into your pension. Contributions will be limited to £4,000 each year which will be topped up to £5,000. And savers will stop receiving their top up once they reach age 50. LISA contributions will count towards the total ISA savings limit which will increase to £20,000 in 2017/18.
How it works on the way out
Funds can be accessed tax free after the age of 60. But to help first time buyers, funds may be withdrawn tax free to cover the cost of a deposit on their first home. And anyone already saving into a Help to Buy ISA will be able to transfer their existing savings to the new LISA.
Accessing savings before age 60 for other reasons will be allowed but the Government Bonus, and the growth on it, will be lost. There will also a 5% tax charge applied on the amount withdrawn.
As with other ISA schemes, the LISA will form part of the estate for IHT.