The Lifetime ISA (LISA) was introduced as a tax-free wrapper enabling those aged between 18-39 to hold £4,000 each year, with the incentive of a 25% government bonus capped at £1,000 per year. Launched in April 2017, the LISA was designed as a hybrid product with two specific purposes; so first-time buyers could save and use towards a deposit for a residential property, and as a retirement savings pot.
LISA hasn’t however proved popular with the Treasury Select Committee calling for its abolishment following strong criticism of its complexity, “perverse incentives” and its lack of popularity with the industry and savers.
The alleged problem with the Lifetime ISA lies in its ambitious aim to join first home savings alongside building a retirement pot, causing confusion over where and when it can be used most effectively. Despite the initial hype, only a handful of companies offer a stocks and shares Lifetime ISA.
In a wide-ranging report, the Treasury Select Committee queried the merits of using a LISA as a retirement planning vehicle, suspecting that it could undermine future retirement security; if employees opt-out of their employer’s pension scheme in order to save into a LISA, they could lose out on the benefit of receiving employer pension contributions, higher-rate tax relief and national insurance relief.
Over-indebtedness, lack of rainy day savings and insufficient pension savings are some of the weaknesses identified. A considerable issue raised by The Treasury Committee concerned the Government not providing appropriate clarity over the penalty for early withdrawals, where savers lose not only their 25% bonus but also a fraction of their capital. Withdrawal for any other purpose will trigger a 25% exit penalty levied by the government.
A Lifetime ISA is intended to be a long-term savings product. It is not designed to encourage regular withdrawals. If you withdraw money for any reason other than buying your first home, or at age 60, or if you are terminally ill, a charge of 25% will be applied to the amount you withdraw. After you turn 60, money you withdraw from your Lifetime ISA account is restriction-free and doesn’t incur a government charge.
Whilst it hasn’t proven popular, taking advantage of a Lifetime ISA is going to prove to be an excellent decision for some people and one that may be worth taking very soon in case the facility is withdrawn.
By staying aware of all your tax-efficient options, and investing smartly across a diverse portfolio, there may be significant tax reliefs that you can utilise. To make best use of all of these reliefs, you are best-placed speaking to a qualified financial adviser, who will be able to assess your current tax situation and therefore advise you on how to make the most of these allowances across your portfolio.
If you are confused by the number and types of ISAs now available in the market, don’t worry you are not alone. To find out how to get more from your ISA, we encourage most of our clients to invest as much as they can in an ISA every year to take advantage of these tax-efficient wrappers. You pay no Income Tax on the interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax. The amount that you can invest in an ISA has been increasing year on year, reaching £20,000 for this tax year. For many people in their fifties however, ISAs are in fact the second-best option for saving so make sure you get the right advice.
- The value of investments and the income they produce can fall as well as rise. You may get back less than you invested