2016 Budget - ISA changes

veryintrigued

mikjhaycock wrote: »

(apologies if this has been asked already)


The ISA limit will increase to £20k in 2017/18


Q: If I choose to invest in the lifetime ISA - does the additional government top up contribute to this amount or not? I.e. If put in the full £4k and then the gov. adds the additional £1k does this actually equate to £5k of the ISA allowance? This would mean the maximum you could add would actually only be 19k should you invest in the Lifetime ISA.


If anyone has an answer to this one it would be helpful :-)


Thanks!
Mike

The £20k is of your money - i.e. excludes any gain in the form of interest and this 25% sweetener.

andyca

Cisco001 wrote: »

Let say this year 1, you open lifetime isa in bank a. Put 4000 in. You end up 5000 + interest.

Year 2, you open open another lifetime isa in bank b, again max out. i.e. £5000 + interest

Unfortunately, in year 3, you need to withdraw. Say £2000 from bank B. Will it affect the bonus in bank A?

jamesd comment that I only lost bonus at the account I decided to withdraw, i.e. bank B only. (although I am not entirely sure)

Then, another scenario is, on year 2, i did not open another lifetime isa in bank b, I keep put in £4000 in bank a with same account.

When it come to year 3 I need to withdraw, will this affect the bonus you earned on year 1?

Remember the wording from government is

"you can withdraw the money at any time before you turn 60, but you will lose the government bonus (and any interest or growth on this).
You will also have to pay a 5% charge"

The only way this can work is if you only lose the bonus on the amount you withdraw.

Using your example; if you withdraw £2000 you will lose £500 in government bonuses any interest the £2500* has earned you and a £100 penalty (5% of the £2000 you withdrew) You will lose this amount no matter which account you withdraw it from.

However if the LISAs work on a First in First out basis (hopefully they won't), you would be better to remove the money from the newer account as the interest accrued will be less. (So you will lose slightly less)

*EDIT: I have just read the Interest penalty is only on the Government bonus. All of the above still applies but the interest penalty will only be on the interest accrued on the £500, not the full £2500.

kidmugsy

smichr wrote: »

I don't know if I trust Governments enough for that. Heck, ISA's only launched in 1999.

Yes, but they were just a rebranding of the earlier PEPs and TESSAs.

kidmugsy

The Bank of Mum and Dad will be under some pressure. "Ooh, Mum, if you give me £4k I can turn it into £5k overnight."

System

I think the lifetime isa could be quite poor if money is held at low rates for a long time - the 1000 is good if its in there for 11 years, but not if its in there 42 years. Good for first time buyers, bad as a pension

masonic

MatthewAinsworth wrote: »

I think the lifetime isa could be quite poor if money is held at low rates for a long time - the 1000 is good if its in there for 11 years, but not if its in there 42 years. Good for first time buyers, bad as a pension

Anyone considering a lifetime ISA over the long term should treat it like a pension. You wouldn't hold cash in a pension for all those years for exactly the same reason. Cash is not a good asset class for long term investing and you don't have to hold cash in your lifetime ISA.

kidmugsy

DragonQ wrote: »

So once you're a homeowner, essentially this Lifetime ISA is a pension with a guaranteed return (25% + annual interest rate) and the option to withdraw the money for a fee if you really need it before you're 60?

Seems so. I'd think that people below forty would be wise to open one for however small a contribution, so that they retain the right to fill it up with bigger contributions in their forties if they want to. It's a virtually free way to buy some optionality.

Jaz555

Moby_Tide wrote: »

I'm just over the age limit but the cynic in me says that this is the perfect way to scrap higher rate tax relief on those eligible for the bonus. on average people tend to be earning the most in their 40s/50s and most likely to be in a higher band so then it starts recouping what was paid out whilst they were in their 20s/30s. They could even go all the way and scrap any tax relief

Anyone 40+ still then has 25 years or so under the old rules as the govt tax relief contributions will then diminish

Yes I too am worried about what this change signals for the future. I'm 26 and would rather have the guarantee that the pension system will remain the same than this savings scheme.

As a stand alone policy this is great for me (I am currently saving a deposit for my first home) and I will be taking full advantage and will roll my H2B Isa into it. Unfortunately I don't think this will be a stand alone policy and signals the start of major changes to the pensions system for the younger generation. It was well documented before the budget that Osbourne wants to remove pension tax relief and replace it with a Pension Isa where money is paid in from taxed income. Maybe like this Lifetime Isa you will get a 25% bonus, effectively BR tax relief, but this would severely penalise HR tax payers of which I will hopefully be one in the not to distant future. As my workplace pension is fairly generous (And I make full use of it) I imagine this change would make me tens of thousands of pounds worse off over my lifetime.

To those over 40 complaining they are not eligible, I sense that once again, you will be the ones who come out with the best deal overall.

System

I'd rather have a pension company invest the money than try to do it myself, I think, as I don't know enough about stocks and shares and learning about it and managing it counts as work

I have a defined benefit pension so it's sort of insured

DragonQ

kidmugsy wrote: »

Seems so. I'd think that people below forty would be wise to open one for however small a contribution, so that they retain the right to fill it up with bigger contributions in their forties if they want to. It's a virtually free way to buy some optionality.

That's basically what I plan to do. I already contribute a lot to a private pension and obviously want money in the short and medium term too. If the interest rate of lifetime ISAs is crap then I won't put that much into it, but at least if it's open I can transfer in more later.