ISAs  

Lifetime Isas come with sting in the tail

Lifetime Isas come with sting in the tail

Draft legislation has been published to outline the structure of the Lifetime Isa regime put forward in the 2016 Budget by George Osborne.

Any tax-privileged investments are worthy of consideration, and the more access to such vehicles that clients can have, the more chance we will have of finding a balance between current spending and saving for the longer term.

The Bill that was published recently was never going to be the finished article in terms of what clients will eventually have access to – that will only come when it is introduced into the committee stage in Parliament. However, the headline features have been confirmed:

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• Individuals aged between 18 and 40 will be able to open and invest in a Lisa and will be able to contribute up to £4,000 each year, up to their 50th birthday;

• That £4,000 will form part of an individual’s overall Isa allowance for the year (£15,240 for tax year 2016/17 and £20,000 in 2017/18)

• At the end of each tax year, a 25 per cent bonus will be added by the government, meaning that a total savings level of £5,000 can be achieved;

• From 18 to 50 this could mean a total bonus of £32,000

• Like other Isa arrangements, the plan will be income tax and capital gains tax free

• Lisa will be available as cash or stocks and shares accounts

• Proceeds from the Lifetime Isa can be taken tax-free:

If the proceeds are used to aid purchase of a first home (with a maximum value of £450,000), or

If the client is over age 60, or

If the client is terminally ill, or

If the client has died.

A couple could utilise two Lisa plans, doubling the funds available, provided that this was the first home for both parties.

Clients can still have access to their investment outside these instances. But that access comes with a sting in the tail. Should a client withdraw funds outside the permissible criteria, a penalty will be applied, withdrawing the entire government bonus attributed, including interest and an additional penalty of 5 per cent for good measure.

Despite its anticipated announcement, the ability to borrow money from a Lifetime Isa has not been included in the draft legislation and perhaps in the long run this will keep things simple and remove additional complications in the operation of these plans.

While the need for legislation that claws back the government top-up is clear for all to see, the level of additional penalties seems unduly harsh and is perhaps likely to prove to be a feature that puts clients off. If high exit penalties on pension plans proved to be a disincentive to invest, there will be little surprise if the same objections were heard from clients now.

So where does this leave us and clients? As mentioned previously, any encouragement that can be given to save for the longer term is a good thing, and the attraction of a free government top-up is a welcome feature. Planners will look to build plans for clients that have the right balance between maximising the tax privileges available and suiting their ongoing needs for access.