Why the new Isa?
To understand why the Lisa is being introduced, we must first look at the relevant policy issue it is trying to address:
• To deliver transparency, increase people’s knowledge of and engagement with pension savings. The solution here is the pensions dashboard, although it still looks a long way off,
• To encourage younger people to save.
This is all against the backdrop of a pensions tax relief consultation which provided no consensus on change. Furthermore, initial results of the take-up of Help to Buy (350,000 and counting) showed younger people are more likely to save independently for property than for retirement. Therefore, instead of changing pensions, the decision was made to go for a new product, which would be incentivised and which could be used for both purposes – firstly property, to get people into the savings habit, and then subsequently retirement – potentially killing two birds with one stone.
Policy makers are very keen to get younger people to think about long-term planning and planners will be applauding them for that.
Lisa structure
A Lisa is obviously an Isa and as such will be subject to Isa regulations. Regardless of some similarities to pensions and the thought that it is the first step toward a longer term ambition to become the new way of saving for retirement, it is not a pension. Concerns from pension providers about the impact on auto-enrolment opt-outs are somewhat premature.
The Lisa is a complementary product to the current suite of products available, which avoids the black and white decision – whether to save for property or for a pension.
There will be cash and stocks-and-shares versions, but no Innovative Finance Isa option.
Up to £4,000 can be saved or invested per year, which will attract a bonus of 25 per cent of the amount contributed, up to £1,000. It is important to say this is a bonus and not tax relief. The £4,000 Lisa allowance falls within the overall £20,000 Isa allowance for tax year 2017/18.
As with all other Isas, growth, interest and income are all tax-free.
Eligibility
Lisas will be available to all UK residents over the age of 18 and under 40. Once opened, contributions can be paid until age 50, providing the opportunity to save a maximum of £128,000 with a bonus of £32,000 on top. Third party payments are also possible.
To me it would make more sense to say everyone born on or after 6th April 1977 would be eligible. This would allow those who can’t afford a Lisa at age 39 to still be eligible if they can afford it by the time they are 41.
Bonuses
The current plan is that bonuses will be applied for annually (April) by Lisa managers and then paid the following summer.
There is a good case for a monthly bonus or certainly for bonuses to be paid when contributions are made (as per the ‘P’ word). This would encourage regular savings and avoid people waiting to bunch contributions to the end of a tax year (the problem currently is that contributions paid on 6 April 2017 would not receive a bonus until the summer of 2018).
It is also recognised that people buying a house want their money quickly and the current proposal does not fit in with that.
Withdrawals
Withdrawals are tax-free, as with other Isas, but only if used to purchase a first property or, after the age of 60, for retirement. In any other circumstances withdrawals will carry a 25 per cent charge. This charge is based on the amount withdrawn and conceptually it is a clawback of the bonus plus an additional 5 per cent.
Where people choose to withdraw savings from the Lisa to make a first home purchase, the withdrawal will then be paid direct to the conveyancer. If the purchase subsequently falls through then the funds will be returned to the same Isa manager by the conveyancer and will not count toward the annual contribution limit.
There is no plan to allow flexible Isa provisions due to the complications around reporting of amounts pre- and post-bonus, which seems sensible.
Link to Help to Buy Isa
The new Lisa will help younger investors save for a house or for their retirement. Like a Help to Buy Isa, it comes with a government top-up, but unlike the Help to Buy Isa, you get this top-up at the end of the tax year. Other differences include the fact that you can invest in stocks and shares or cash (Help to Buy Isas only offer cash) and you do not have to save each month; you can put in a lump sum each year.
It is perfectly possible for someone to have a Help to Buy Isa and a Lifetime Isa at the same time. However, upon house purchase, only the bonus for one or the other could be used.
There will also be a one-year window in 2017/18 in which people can transfer a Help to Buy Isa to a Lisa and pick up the bonus.
The Help to Buy Isa has a limited lifespan and it is expected that Lisa will shorten that further.
One question is whether investors should be able to pay more than the £4,000 a year without a bonus? There seems little value here given that the money would be tied up and would still be subject to penalty on withdrawal. Why not just use a fund Isa?
Isa transfers
Individuals will be able to transfer savings from other Isas as one way of funding their Lisa. The first £4,000 will be treated as a contribution and will attract a bonus; the balance will be treated as Isa transfers are now and will not affect the remaining £16,000 Isa limit.
Ill health/terminal illness/death
Early withdrawal without penalty will also be available at any age for ill health or terminal illness under the same definition as a Junior Isa. The government also wants to explore whether investors should be able to access contributions and bonus for other specific life events, such as marriage or the birth of a child. However, these seem difficult to police.
Deceased Lisa
The Lifetime Isa will have the same inheritance tax treatment as all Isas. Upon the death of the account holder, the funds will form part of the estate for inheritance tax purposes. The spouse or civil partner can also inherit their Isa tax advantages and will be able to invest as much into their own Isa as their spouse used to, on top of their usual allowance. The Additional Permitted Subscription process is already under review to extend the tax-free status from death to distribution.
Impact on means test benefits
HMT and HMRC understand that certain means-tested benefits may be impacted by Isa savings and are looking at whether there will be a carve-out for Lisas.
Charges
It is unlikely there will be any restrictions on charges. As a final caveat, note that all these details are based on current understanding and the actual finalised details of Lisa and how it will work will depend upon the consultation process.
| LIFETIME ISA: KEY POINTS |
• Available to all UK residents between the ages of 18 and 40. • Once opened, contributions can be paid until age 50. • Up to £4,000 can be invested each year, which will attract a 25 per cent bonus. • To receive the bonus, funds must be used for a property purchase, retirement or both. • Withdrawals in other circumstances, although tax-free, will incur a 25 per cent charge. • Early withdrawal will be allowable in the event of ill or terminal health. • Growth, interest and income are all tax-free. • The £4,000 Lisa allowance falls within the overall £20,000 Isa allowance for the tax year 2017/18. • A Lisa can accept transfers from other Isas. The first £4,000 will be treated as a contribution and therefore receive a bonus, the remainder will be treated as a standard Isa transfer. • On death, any Lisa funds will form part of the estate for inheritance tax purposes. |
Danny Cox is a chartered financial planner at Hargreaves Lansdown
