FAQ’s Answered
The Lifetime ISA (LISA) is getting criticised from specialists in the market, regarding it’s complexity. Already some providers have announced they are boycotting the product, despite it’s promise of free money. Here we answer some FAQ’s to help break down the barriers of the new LISA.
What is the LISA?
The LISA is a new style ISA which will be available by some providers from April 2017.
The product is designed as a savings vehicle to cover off two key purposes:
- For the purchase of your first property
- For your retirement
Opening a LISA is easy, and the application process is broadly the same as opening other ISA’s.
These terms apply for opening and owning a LISA:
- It is possible to open a LISA if you are between the age of 18 and 40
- Contributions can be made into the LISA until the account holder is 50
How much can I earn from a LISA?
If maximum contributions are made for the maximum duration, there is a potential bonus value of £32,000. However, if you want to use the funds towards your first home, it is unlikely that you will want to wait that long.
The following investment terms apply:
- A maximum of £4,000 per year can be invested
- There is a government bonus available of 25% per year (£1,000), payable at the end of the year
- From 2018/19 the bonus will be paid monthly
- The bonus being paid annually or monthly allows additional financial growth on the balance, which favours the Help to Buy ISA, which is paid only on the final withdrawal
How can I buy a home?
One option for LISA holders is to draw the funds out of the account to buy their first home.
Some rules and regulations apply. Broadly speaking, these are as follows:
- It is essential that you are a first time buyer – you must not have owned a property before
- The maximum property purchase value is £450,000
- The Help to Buy ISA dictates a maximum property value of £250,000, except for in London, where it is £450,000, also.
- Two, or more, partners can pool their LISA’s together, and claim the government contribution per account
- Properties purchased through the LISA are not allowed to be for buy-to-let, only residential.
How can I use the money for retirement?
The second option for LISA holders is to use the money for retirement.
Here, the funds built up within the LISA can be drawn out, after the age of 60, and used for whatever you like.
This could be to clear down a mortgage on your home, re-invest, or just to enjoy through your later years.
The money withdrawn from a LISA will be tax free, as you will have already paid tax on the contributions. This is the opposite to the way a pension works, where the government contributes 25% to your pension contributions, however tax applies on withdrawals, after a 25% tax-free lump sum option
Is the LISA an alternative to a pension?
Experts are warning to take care if you are planning to completely replace a pension with a LISA.
Particularly if you have the option to take advantage of a workplace pension, as the value of employer contributions are likely to exceed that of the LISA bonus.
There are exceptions to this, so it is always best to speak with a professional financial adviser that can give guidance on your own situation.
The rules regarding withdrawal from a LISA for retirement purposes is linked to the state pension age. At present, penalty-free withdrawals from a LISA is set at 60. For a personal pension, it is possible to access your money at age 55, although some tax implications may arise.
These things can be discussed with your financial adviser when looking at an integrated retirement plan for you and your family.
What if I need to access the money sooner?
If you use the money to buy your first home then the funds can be withdrawn at any time, as long as it is for this purpose.
Similarly, if you reach 60, the penalties are dropped and you have full access to your money. In the event that you are diagnosed with a terminal illness, access is also granted.
Other withdrawals are subject to an exit fee of 25%; 20% of which is related to recovering the bonus, and the rest is a fee to cover recouping the investment growth.
If you think you will need access to your money then investing in a LISA needs careful consideration as it could be a hefty price to pay.
For example: If you invest £4,000, with the 25% top up from the government, you have £5,000 in your LISA. Early withdrawal would result in a penalty of 25% which is £1,250. In this scenario, there would be £3,750 remaining, 6.5% less than your initial investment.
Before you go…
Don’t forget to download our FREE Financial Guide with information all about the Lifetime ISA.
Need help with your retirement plans? Speak to Darren
Retirement planning for doctors and dentists is essential, as with the level of income you earn, you have options. Please contact Darren for a free, no obligation appraisal.
Tel: 01403 780 770