What is the Lifetime Isa?

The government has aimed this Isa at a younger generation of savers who want to put aside their hard-earned money to buy a first home or save for retirement, so only those aged between 18 and 39 will be able to apply to open one.

Anyone who takes out a Lifetime Isa, dubbed the Lisa, can save up to £4,000 each tax year into the vehicle and will receive a government bonus of 25 per cent of the contribution.

This means if someone pays in the maximum £4,000 contribution, they will get an additional £1,000 from the government.

It is worth knowing this counts towards the overall Isa subscription which has gone up to a rather generous £20,000 in the 2017-18 tax year.

Isa regime

Isas have always been a simple and tax efficient savings product, designed to encourage those of all ages and abilities to set some money aside on a regular basis.

Rachel Vahey, product technical manager at Nucleus Financial, points out: “It’s important to understand exactly where Lisa sits within the Isa regime, as there are convoluted rules on only being allowed to invest in one Isa type each tax year.”

The devil is indeed in the detail and those who apply for a Lifetime Isa should ensure they are familiar with its workings.

Source: lifetimeisa.campaign.gov.uk

She explains: “Like an Isa, savers can take their money out of their Lisa at any point. But unlike an Isa, unless they withdraw their money to either fund the purchase of a first house or after the age of 60 then there will be a withdrawal charge of 25 per cent of the fund.

“This claws back any government bonus (plus growth), as well as 6.25 per cent of the investor’s subscription (plus any growth). So flexibility may come at a price – and investors need to be aware of these charges.”

Theoretically, someone who opens a Lifetime Isa account aged 18 to save for retirement and keeps contributing the maximum until age 50 will be able to secure lifetime savings of up to £160,000.Niki Patel

Niki Patel, technical consultant at Technical Connection, highlights some other details about the Lifetime Isa.

“In 2017-18 the government bonus will be added at the end of the tax year but from April 2018 the bonus will be added monthly,” she notes.

“It will also be possible for savers to open more than one Lisa in their lifetime but they will only be able to pay into one Lisa in a tax year - thus the rules are similar to those for the general Isa.”

There are some instances in which withdrawing money from the Isa will not incur a charge.

Martin Jarvis, associate consultant at Mattioli Woods, says non-chargeable withdrawals are allowed in the following situations:

• To help buy a first home worth up to £450,000 at any time once 12 months have passed from the point an individual first saved into the account.
• From the age of 60.
• If the individual is terminally ill.

The Lisa will be available as either a cash or stocks and shares Isa depending on the provider, so those who feel comfortable putting their money into the stockmarket can do so, taking a higher risk for a potentially higher return.

Climbing the housing ladder

However a saver chooses to invest, there is the potential to save a significant pot of money with the Lifetime Isa.

As Ms Patel points out: “Theoretically, someone who opens a Lifetime Isa account aged 18 to save for retirement and keeps contributing the maximum until age 50 will be able to secure lifetime savings of up to £160,000 - £128,000 saved by them and £32,000 in government bonuses. 

“At age 50, permitted contributions can continue but the government bonus will cease.”

The fee makes sense as an incentive to use the product for its original intention, but it means the product isn’t simple like an Isa.Jon Greer

Critics of the Lifetime Isa have been quick to point out its similarity to the Help to Buy Isa which, as the name suggests, was aimed at those hoping to get on the housing ladder.

Trevor Clark, operations director at Rutherford Wilkinson, acknowledges the maximum contributions and therefore the potential bonus that can be achieved by the Lifetime Isa is higher, while the penalties and access also differ from the Help to Buy product.

He adds: “The Help to buy Isa is only available in cash and we foresee Lisa to be able to offer either. So, there are differences, and investors need to be made aware of these, especially around the penalty for early access to the Lisa. 

“Some people will undoubtedly fall foul of this charge.”

The Help to Buy Isa can only be used to purchase a property up to £250,000 or £450,000 in London, while the Lisa can be put towards a home worth £450,000 anywhere in the UK.

There is also a difference when it comes to age as the Help to Buy Isa can be taken out by those aged 16 and above.

Jon Greer, pensions expert at Old Mutual Wealth also raises his concerns about the fee for withdrawing money from the Lifetime Isa before the age of 60.

“The fee makes sense as an incentive to use the product for its original intention, but it means the product isn’t simple like an Isa,” he suggests. “This mixes a lot of complexity into what has previously been a simple and successful brand.”

Savvy saving

There is now some complexity surrounding Isas but the Lifetime Isa seems to have little in common with the Innovative Finance Isa (IFISA) – another new Isa vehicle for investors to familiarise themselves with.

Certainly, the Innovative Finance Isa will not be suitable for all savers as it exposes them to what are considered fairly risky investments.

Iain Niblock, chief executive at Orca, confirms the Innovative Finance Isa is distinctly different from the Lifetime Isa.

“An IFISA holds loan-based debentures and P2P investments originating from crowd lending or peer-to-peer lending sites,” he explains.

“The IFISA holds alternative P2P investments which in some cases hold risky assets, in comparison to the cash Isa.”

The recent Isa launches certainly demonstrate the flexibility of the product and suggest the government is pushing to get increasing numbers of the UK population saving.

eleanor.duncan@ft.com