The Lifetime ISA : The hidden catch
This article is for information only and no recommendation is being made or should be construed from the contents of the article. Always seek independent financial advice prior to taking any action.
In March this year, the government announced the launch of the new Lifetime ISA for the under-40s. This is a new scheme to encourage the younger generation to save and prepare for their future.
From April 2017, anyone under the age of 40 will be able to save up to £4,000 per year within this ISA and obtain a Government top-up of £1 for every £4 contributed, which will give a 25pc boost to the money that younger savers put aside. This is aligned to the tax relief applied to pension savings .
However, with most things, there are conditions. The first one being the bonus element, which builds every year, depends on how the money is used.
If you use the ISA to save for a home purchase, you will receive the full value of your savings plus the government bonus. You will also benefit fully if you choose to use the money to fund your retirement – as long as you are over 60.
However, there is a penalty for those who want to use the money for other purposes.
If the saver makes withdrawals from the ISA at any time for other purposes outside those listed above, the government proposes that the bonus element of the fund plus any interest or growth on it will be returned to the government, with a small 5pc charge applied.
And this isn’t the only negative. There is another hidden catch to using this savings vehicle. The Lifetime ISA could cost you over £1,500.
This is due to the fact that the government is only planning to add the bonus at the end of the tax year in April, rather than at the point where you, as a saver, put your money into your ISA account.
This would result in the £1000 top up not earning any interest or investment growth for up to 12 months – and working this over two decades of saving would mean that you would miss out on £1,654.
Obviously, at this point, the Lifetime ISA is a new product only recently introduced and the government are still finalising the rules. Financial Institutions are lobbying hard to ensure the bonus is paid as soon as the saver puts the money into account. An announcement is expected over the next few months on this.
Although this is a positive step by the government to encourage the younger generation to save for the future and it does provide a more flexible way for the self-employed to save for their retirement, with greater freedom to withdraw funds if needed, there are other savings vehicles available.
If you would like more information on the Lifetime ISA or would like to know if there are other more suitable savings products in the market for your needs talk to one of our experienced Financial Advisors at Prosperity IFA. Call us now on 01892 300 303.