Lifetime ISAs aim to help people aged between 18 and 40 save for their first home or retirement.
A Lifetime ISA (LISA) lets you save up to £4,000 per year. At the end of the tax year, the Government will top up your ISA with a 25% bonus. These bonuses are available on LISA contributions up until the age of 50.
Any money paid into your LISA count towards the annual ISA contribution limit of £20,000.
A LISA holder can use the money to help buy a first home worth up to £450,000 which needs to involve a mortgage. This can happen at any time 12 months after first saving into the account. A LISA holder can also withdraw the money from age 60 tax-free for any purpose. LISA holders can also access their savings if they become terminally ill. LISA holders can withdraw money at any time for other purposes. However, the Government will apply a 20% government withdrawal charge.
The government will provide a bonus of 25% on all contributions to a LISA within the limits. This bonus is on the amount paid in, not on any interest or investment growth. On a £4,000 investment, this is £1,000. The relevant ISA manager will claim the bonus from HMRC and pay this into your LISA.
Lifetime ISAs can hold cash, stocks and shares and other qualifying investments.
Who can hold a LISA?
For someone to be eligible to invest in a LISA, they must 18 or over but under 40 at the time they open the LISA. Anyone investing in a LISA must be either a resident in the UK. Crown servants serving overseas and their spouses, if they go with them, can invest also.
When someone stops being eligible to invest in a LISA, any existing LISAs will continue to be exempt from UK tax. However, no more contributions can take place.
Those who are eligible can contribute to one LISA in each tax year. They can also contribute to a cash ISA, a stocks and shares ISA, and an Innovative Finance ISA. This is long as the total contributions fall within the overall ISA limit of £20,000.
How are LISAs taxed?
Any investment returns received will be tax-free. There is no personal tax on any income taken and no capital gains tax on any gains made.
HMRC include the value of LISAs for Inheritance Tax purposes.
What happens on the death of a LISA holder?
The spouse or civil partner of a deceased LISA holder will have an Additional Permitted Subscription (APS) equal to the value of their ISAs, including LISAs, at death. The money will no longer be inside a LISA wrapper, so no government charge will apply on withdrawals. If the individual is eligible, they could pay up to £4,000 per annum of this into their own LISA.
What are the rules around taking money out?
A LISA holder can withdraw their money before they are 60. However, they will have to pay a withdrawal charge of 20% (will increase to 25% at the end of the tax year). This is unless the LISA holder is buying their first home or terminally ill. Transfers to different types of ISAs suffer this charge.
If you transfer your LISA to a different type of ISA, you’ll also have to pay a withdrawal charge.
What are the risks?
There are many risks anyone considering a LISA need to think about:
- Governments can and do change the rules on tax-efficient vehicles, like LISAs.
- There is no guarantee a LISA will be worth more in the future and it could be worth a lower amount.
- Income generated from investments held in LISAs is variable and is not guaranteed.
- Taking income may erode the capital value of the LISA and may be unsustainable.
- Past performance is no guarantee of future returns.
- If growth is low, charges may eat into the capital invested.
- When funds invest in overseas assets, the value will go up and down in line with movements in exchange rates as well as the changes in the value of the fund’s holdings.
- Where a fund invests in emerging markets, its value is likely to move up and down to a higher degree and more often than one that invests in developed markets. These markets may not be as strictly regulated, and securities may be harder to buy and sell than those in more developed markets. These markets may also be politically unstable, which can result in the fund carrying more risk.
- Where a fund invests in fixed interest securities, such as company, government, index-linked or convertible bonds, changes in interest rates or inflation can contribute to the value of the investment going up or down. For example, if interest rates rise, the value is likely to fall.
- Where a fund invests in derivatives as part of its investment strategy, over and above their use for managing the fund more efficiently, under certain circumstances, derivatives can result in large movements in the value of the fund. The fund may also expose itself to the risk of the issuer of the derivative not honouring their obligations, leading to losses.
- Cash/Money Market Funds are different from cash deposit accounts, and their value can fall. Also, in a low-interest-rate environment, the product or fund charges may be higher than the return.
- Where a fund invests in property funds, property shares or direct property, properties are not always readily sellable, which can lead to times when fundholders are unable to ‘cash in’ or switch part or all their holding. Property valuations are made by independent valuers but are ultimately subjective and a matter of judgement Property transaction costs are high due to legal fees, valuations and stamp duty, which will affect the fund’s returns.
- High Yield Bond funds invest in non-investment grade bonds which carry a higher risk that the issuer may not be able to pay interest or return capital. Also, economic conditions and interest rate movements will have a more significant effect on their price. There may be times when these bonds are not easy to buy and sell.
The Financial Services Compensation Scheme
The FSCS exists to protect clients of FCA authorised firms. It covers deposits, insurance, and investments. It compensates individuals who lose money due to their dealings with FCA authorised firms where the firm cannot pay the claims themselves. This is usually because they are insolvent or have stopped trading. The limit of protection varies between assorted products.
A key factor when recommending providers is financial stability. We regularly review this. Any assets they hold for a client are held separately. These assets are ring-fenced from any creditors of the provider.
The same is true for any investment funds we recommend. If the fund manager were to go into default this should not affect the underlying assets of the fund. The FSCS would only come into play if the manager was negligent and could not pay the claims arising from this. The FSCS would cover the outstanding compensation up to £85,000 per person for each fund manager. They do not pay cannot claim compensation just because the value of an investment falls.