Could a Lifetime ISA help you save up for a property?
April 2017 sees the introduction of Lifetime ISAs. ASPC takes a look at whether this new saving method could help you save for a property.
What actually IS a Lifetime ISA?
Currently, an Individual Savings Account (ISA) is a savings account that will not charge you tax on any interest on savings of up to £15,240 each tax year.
The new Lifetime ISA, which will be introduced at the start of the new tax year (6th of April 2017), is a longer-term tax free savings account, primarily intended to encourage people to save for retirement, that lets you save up to £4000 a year. Additionally, there may be a government bonus of 25% on the money that you put in. So effectively, for every £4 you put into your Lifetime ISA, the government will give you another £1. This all sounds fantastic, except that you will not receive the bonus if you withdraw the money before you are 60…
An exception is made, however, for those putting down a deposit for their first home – which may be beneficial for those looking to start their first home.
Who can get one?
The account is purely for those who are over 18 and under 40. You must also be either a resident in the UK, a crown servant (for example, a diplomat) or the spouse/civil partner of a crown servant.
You will be able to keep paying money every year into your Lifetime ISA until the age of 50, at which point the account will stay open and your savings in it will remain tax free, but you will no longer be able to pay any money into it.
So, if someone were to open a Lifetime ISA account on their 18th birthday and contributed £4000 a year until they were 50, they would receive a total bonus of £32,000! Bear in mind that interest will be accruing, tax free, also, during this time.
How could this help you save for your property?
The long-term savings account is designed with two specific purposes in mind – for retirement funds to be used after the age of 60 and for first-time buyers to save up for their first home. For saving for your first home the Lifetime ISA seems like a useful way to boost your funds. Your savings and bonus can be put towards a residential property under £450,000 without incurring any kind of withdrawal charge; anything over this will cause you to lose 25% of whatever you withdraw.
This is a big advantage on the current Help-to-Buy ISA, which only offers charge free withdrawals for properties up to £250,000 (unless your property is in London). If you already have one of these and decide that a Lifetime ISA would be more beneficial for you - it is possible to transfer your savings over.
But are you a first-time buyer?
First-time buyers are those who have never bought or owned any shares in a property. If you have previously owned even part of a property – you would not be eligible to use your Lifetime ISA without incurring a charge.
While there is no such thing as a joint Lifetime ISA, you and a house-buying partner can open separate Lifetime ISAs and use them to purchase your home together – effectively doubling your bonus! Again, this will only apply if BOTH of you are first time buyers. If one of you has previously owned a property in any way they will only be able to use their Lifetime ISA for retirement funds.
Is a Lifetime ISA for you?
While the account may be of value for those looking to get on the property ladder, there will be terms and conditions that may not reconcile with your circumstances – so make sure you look into the detail before investing.
A Lifetime ISA is designed to help you save, effectively, for retirement but does offer a further means of saving for your first home. Withdrawals for any other reason will attract penalties.