The Lifetime Individual Savings Account (the Lifetime ISA or LISA) was announced in the March 2016 Budget. This came with the announcement that ‘the government wants to help young people save flexibly for the long term and ensure they do not have to choose between saving for retirement and saving for their first home’.
Who is LISA?
From 06 April 2017, LISA is a new savings vehicle that will be available to people under the age of 40 with the following key features:
- One person, one LISA
- Eligible savers can invest with no maximum monthly continuation up to £4,000 per year
- Investments can continue up to the saver’s 50th birthday
- Annual investments will be supplemented by a 25% Government ‘bonus’, together with interest
Therefore, assuming that the maximum £4,000 is invested each year, the Government will increment this by £1,000. Plus there is interest on top.
LISA funds can be withdrawn in three circumstances:
Saving for a first home
The savings, together with the Government bonus and interest, can be withdrawn at any time and used for a deposit on a first property – as long as the purchase price of the property is less than £450,000. Therefore, two or more people buying the same home can cash in their LISAs to put towards the deposit.
Help to Buy ISAs will remain and can continue to be opened until November 2019. Or, the funds can be transferred to LISA from 2017 onwards. If the saver has both, when it comes to using Help to Buy or LISA for the deposit, only one of the Government bonuses can be used.
Saving for retirement
The savings, together with the Government bonus and interest, can be withdrawn from the age of 60. The withdrawal will be free from a tax liability.
Saving for something else
The Government says that, whilst the objective of LISA is saving for property or retirement, funds can be withdrawn in other circumstances. However, to maintain the incentive of saving for the longer term, if it is used for something else, the Government will withdraw the bonus, withdraw the interest and apply a 5% withdrawal fee.
The problem with LISA
Buying a house and saving for retirement are two of the biggest lifetime decisions an individual will make. Therefore, surely, this new savings vehicle is to be welcomed.
However, does the promise of a Government bonus and tax-free withdrawals from the age of 60 perhaps undermine the existing regime of saving for retirement, aka Auto-Enrolment? Certainly, withdrawing the monies for anything other than property or retirement seems to suffer severe penalties. Is the same true for using LISA as a retirement pension ‘pot’? This seemed to be a concern for the Work and Pensions Select Committee when they reported that LISA may compliment pension saving but may well prove a distraction.
Coinciding with a critical point in the Auto-Enrolment roll-out, I am inclined to agree, with many, many small employers yet to stage and the 2017 increase in minimum contribution rates. Let’s hope that there is a communication plan that emphasises that LISA is not a pension, though workers need to consider them both. Let’s me also hope and stress that employers should not offer up LISA in the hope of avoiding their Auto-Enrolment obligations.
LISA, though, is a confusing distraction and not for everyone. However, she is an ever-closer reality as the Savings (Government Contributions) Bill was introduced to Parliament on Tuesday 6 September 2016.
For the sake of completeness, this Bill also introduces the Help-to-Save account, in which anyone in work and in receipt of Universal Credit or Working Tax Credits will be able to save up to £50 a month and receive a 50% bonus after 2 years – worth up to £600. The Bill provides the primary legislation for these to be introduced at a later date, which the Government have said will be no later than 2018.
The Bill applies UK-wide. The Government bonuses offered in LISA and Help-to-Save are made ‘excepted matters’ in the Northern Ireland Act 1998. These are defined as issues of ‘national importance’ which are never meant for devolution. Excepted matters do not apply in Scotland or Wales.