The Budget 2016 announced details of a new style ISA, called the Lifetime ISA (or LISA) that will be available from April 2017 for all 18 to 40 year olds. It will be a flexible way for young people to save towards their first home and their retirement, at the same time, and the government are topping up any investment with a 25% bonus.
ISA’s are a tax efficient way to save, as interest earned is tax-free, and subsequently they are a popular choice for many contractors and freelancers to save for tax, property investments, future financial requirements as well as just having an accessible “rainy-day fund”.
Long-term retirement planning
Prior to the Budget there had been much speculation about the Chancellor announcing a cut in the tax relief on pensions. However, whilst this didn’t come to fruition this time, the new LISA is viewed somewhat as a testing ground for a pension system which rewards the holder in the same way as an ISA.
The government have a key focus to turn the UK population into “savers”, so this initiative will be tried and tested, and the reaction of the market assessed, to see if the pension system can follow suit in future years.
Young people are a particular target for the government to encourage to save for their retirement so the new LISA will be available to open only to those under 40.
Need help with tax planning
ISA’s are a tax efficient way for contractors and freelancers to save and can be integrated into a structured retirement plan, whilst saving you tax in the meantime.
Send an email for some initial advice – firstname.lastname@example.org
Key facts about the LISA
Opening a LISA:
- Anyone between age 18 and 40 can open a LISA
- Opening a LISA will be more or less the same as opening a regular ISA
- Multiples LISA’s can be opened in your lifetime, but only one can be used for contributions in each tax year
- A LISA can be a Cash fund or a Stocks & Shares fund
- Transfers between LISA’s will be possible to maximise deals from providers, although a 30 day limit will apply.
Investing in a LISA
- The maximum contribution per tax year is £4,000
- There is no minimum monthly contribution
- The government will add 25% bonus to all contributions, to a maximum of £1,000
- The bonus will be added at the end of the tax year so that the fund can benefit from growth on the contribution and the bonus
- Contributions can be made, and bonuses received until the account holder is 50 years old
- The maximum lifetime allowance for investment in a LISA is £128,000
- This means the maximum bonus for one LISA holder is £32,000
- The annual ISA allowance for maximum contributions, tax-free, for 17/18 is £20,000
- This includes LISA contributions
- Further investment into a LISA is possible past 50 years of age, and, contributions in excess of £4,000 per year is possible too, however the government bonus is not available
Benefiting from a LISA
- The main benefit of a LISA is that savings can be made for retirement, or for a first home purchase
- 100% of funds can be withdrawn at any time after 12 months to go towards a first home deposit
- The home must be valued at £450,000 or less, and be UK based
- If two or more people are buying a property jointly, multiple LISA funds can be used
- The property must be for residential purposes and not buy-to-let investment
- Funds can be withdrawn after the age of 60 for any other purposes, perhaps to pay off the mortgage, deal with the transition into retirement, or fulfilling those life dreams