25% Government Bonus on Savings For Under-40s

Question.

I am in my mid 30’s and I have read about a new Lifetime Individual Savings Account scheme that the government is launching from April 2017. Can you explain what this is and the tax benefits of this new scheme?

Answer.

The new Lifetime ISA (LISA) launching in April 2017 is a government incentive to help young people save for their first home or retirement. The government will add a 25% bonus on top of what you save – meaning up to £32,000 of free cash.

You can save up to £4,000 a year into the LISA either as a lump sum or by putting in cash when you can. Then the government will add a 25% bonus on top. So if you save £1,000 you’ll have £1,250 and if you save the full £4,000 you’ll have £5,000 each year. And that’s before interest or growth. Some of the key conditions include are:

The bonus is paid until you reach age 50.
The bonus is paid annually in the 2017/18 tax year, then monthly from April 2018 – once in your account it counts as your money. You’ll be paid interest on it too.
The bonus is paid on contributions.
The maximum bonus you could get is £32,000 (unless the rules change); to do that you’d need to open one on your 18th birthday and keep contributing the maximum £4,000 each year until you were 50.
If you’ll reach 40 on or before 6 April 2017 you won’t be eligible for a LISA – so the earliest you could’ve been born to be eligible is 7 April 1977.

The LISA is designed for two specific purposes. The first is for first-time buyers to use towards a residential property, and that can be done at any time, provided the Lifetime ISA’s been held for 12 months or more. The second is to take out and use in retirement once you hit age 60. With both, there is no tax to pay on it when you take the money out.

You can take some or all of your cash out of a LISA before age 60 even if you’re not buying a house. But if you do it’ll usually cost you, so it should be seen as an extreme measure, though this may still be more flexible than a pension.

The Lifetime ISA is, well, an ISA – an individual savings account – which is a place to save where the taxman can’t get his hands on the interest you make. From April 2017 you’ll be allowed to put £20,000 in ISAs each year and the money you put in your LISA will count towards that. So if you put £4,000 in the LISA you’ll only be able to put £16,000 in other ISAs – the bonus you get doesn’t count towards the year’s ISA allowance.

Interest is paid tax-free on the amount you contribute and any government bonus that’s already in the account when the interest’s paid. Also, the interest earned doesn’t count towards your personal savings allowance, so there’s no impact on your ability to earn £1,000 a year of interest tax-free as a basic-rate taxpayer from other savings (£500 higher rate).

The advice in this column is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.