Despite the rumours of low take up amongst pension providers and banks the Government is pressing ahead with its intention to introduce the Lifetime ISA (LISA) from April 2017.
The Government has now published the Savings (Government Contributions) Bill 2016. This draft legislation outlines some of the key features of the LISA product.
So, from April 2017 if you are aged between 18 and 40 you will be able to open a LISA with an approved account holder.
Paying money in
- Individuals can pay in £4,000 per tax year
- At the end of the tax year the Government will provide a 25% bonus on savings made in respect of savers below age 50. This caps the maximum bonus at £1,000 per tax year.
- Contributions count towards the overall £20,000 per annum ISA limit.
- There will be penalties for dishonest claims of a bonus
Taking money out
Funds can be taken from a LISA without triggering a tax charge:
- When the account holder reaches age 60
- When buying a first home (worth up to £450,000)
- When suffering from a terminal illness
- After the death of the account holder
Money can be taken for other purposes before age 60 however, an exit penalty of 25% “(government charge) is applied to the amount of the withdrawal.” This is designed to return the government bonus element (including any interest or growth on that bonus) plus a small additional charge.
This charging structure has been criticised as harsh. For example, if someone contributed the maximum over ten years that would have a total investment of £50,000 (£4,000 x 10 plus £10,000 in top ups), with an assumption for growth this could be around £62,432 and exit charge of 25% (£15,608) leaving the investor with £46,824.
This does mean that people who get a LISA will have to be quite confident that they will use it later in life or a for house purchase, and nothing else.
The processes, evidence and conditions for making the payments will be detailed in later regulations. However, it should be noted that there has been recent controversy about the payment of the Government bonus for the Help to Buy ISA meant it could not be used for a deposit and can only be used on completion. A serious flaw in the system which could yet be replicated here.
It was originally discussed whether the Government would allow access to the LISA with the Government bonus at other life events and whether it would be possible to borrow on the funds. The Bill is silent on these matter and so it is possible these have been set aside due to the relatively short timescale we have until the launch.
Transfers from the Help to buy ISA will be permitted in the 2017/16 tax year and while these won’t count towards the LISA contribution limit they will attracted a 25% bonus on the transferred funds. From 2018/19 transfers from Help to Buy will count towards the LISA contribution limit and will also attract the 25% bonus.