Lifetime ISAs guide

masonic

bclark1605 wrote: »

I am looking to re-mortgage in 5 years. The house is solely in my name. If we get a joint mortgage can my wife use the new Lifetime ISA to fund her half of the mortgage and claim the 25% bonus? She has never owned a house before in her name and is under 40.

To benefit from the bonus, the home must be sold to the FTB. You could try selling it to her, I suppose, but the fees might outweigh the bonus.

Jojo17_2

Hi, my partner and I have both been saving in a help to buy ISA, we are both first time buyers looking to buy in the next few years. My partner is over 40 and I am in my 30s. If I transfer to a LISA and my partner keeps his help to buy, will we still be able to merge the 2 and use the bonuses from both accounts to buy a property?

masonic

Jojo17 wrote: »

Hi, my partner and I have both been saving in a help to buy ISA, we are both first time buyers looking to buy in the next few years. My partner is over 40 and I am in my 30s. If I transfer to a LISA and my partner keeps his help to buy, will we still be able to merge the 2 and use the bonuses from both accounts to buy a property?

Yes, you can do that.

Jojo17_2

Ok great thanks

LucienSanchez

Hi,

I'm struggling to work out the rules on holding both a Help to Buy and Lifetime ISA, potentially allowing £4000+£2400 to be saved each year. Is this permitted?

Additionally, would I be able to keep my current Cash ISA?

Many thanks in advance for your wisdom!

L

Ed-1

LucienSanchez wrote: »

Hi,

I'm struggling to work out the rules on holding both a Help to Buy and Lifetime ISA, potentially allowing £4000+£2400 to be saved each year. Is this permitted?

Additionally, would I be able to keep my current Cash ISA?

Many thanks in advance for your wisdom!

L

A Help to Buy ISA is a cash ISA. You can't pay new money into both a Help to Buy ISA and a cash ISA in the same tax year. Nothing wrong with merely holding previous year money in a cash ISA and paying new money into a Help to Buy ISA though.

There's nothing wrong with paying new money into both a Help to Buy ISA and a Lifetime ISA in the same year, although if you use the LISA to buy a first home, you can't also get the bonus on the Help to Buy ISA.

Forrest87

Hi,
I wonder if anyone can help.

Some background info first to set the scene. I have two sons (19 & 17) and some years back I opened Stakeholder Pensions for both and have contributed the max amount allowable each year. When my elder son turned 18, he then started contributing additional money himself from his part-time job and does so monthly. Last year, I also opened Help to Buy ISA's for both and contributed the max to each.

They are in the fortunate position that they will not be using the H2B ISA's to buy property as my wife and I will be helping them to do that via Lifetime Allowance gifts to both, so all investments will be going towards their retirement.

From April, I will open the LISA for the 19yr old and will transfer the H2B ISA across to benefit from the additional bonus offered by the Govt. When the 17yr old turns 18 in Nov, I will repeat the same exercise. The H2B ISA is a Cash ISA and I will be looking to open a S&S LISA, but can the Cash ISA money be converted to S&S within the LISA?

Beyond the first year and added bonus within the LISA, should I then just continue to fund the Stakeholder Pensions, or the LISA, or both? I appreciate the bonus equates to the same thing and the pension allows access at 55 vs 60 in the LISA, but the LISA allows for withdrawals albeit with an expensive penalty.

Is my thinking/planning correct?

masonic

Forrest87 wrote: »

The H2B ISA is a Cash ISA and I will be looking to open a S&S LISA, but can the Cash ISA money be converted to S&S within the LISA?

There isn't really any such thing as a 'cash LISA' or 'S&S LISA'. The provider may restrict what you can do with the money within a LISA, but HMRC won't care whether there is cash or investments inside. Given LISAs do not exist yet, that's based on what is known now and may be subject to change.

Beyond the first year and added bonus within the LISA, should I then just continue to fund the Stakeholder Pensions, or the LISA, or both? I appreciate the bonus equates to the same thing and the pension allows access at 55 vs 60 in the LISA, but the LISA allows for withdrawals albeit with an expensive penalty.

If they are 19 and 16, then they probably won't be able to access their pension at 55. It is likely this age will remain 10 years below state pension age as the latter rises. It may well be the case that they'll be able to withdraw from the LISA without penalty earlier than they can access their pensions.

I would treat the LISA as being pretty tightly locked up - they might consider accessing the money in an emergency, but the penalty makes it unwise to dip into it if it isn't absolutely necessary. They should have an emergency fund in cash and perhaps a S&S ISA to cover eventualities where they may need the money before 60.

If you continue the arrangement beyond the point where they have a stable job, the best option for them will be to pay into an employer pension via salary sacrifice, which will allow them to reduce their NI contributions as well as income tax, using any money you gift to them to offset that. Beyond that, it comes down to their probable income in retirement as to which is better out of private pension vs LISA - it is probably not easy to predict, so making use of both could be sensible. Of course, if they become higher rate taxpayers, pension will be more attractive.

bowlhead99

Forrest87 wrote: »

They are in the fortunate position that they will not be using the H2B ISA's to buy property as my wife and I will be helping them to do that via Lifetime Allowance gifts to both, so all investments will be going towards their retirement.

Not quite sure what you are referring to as 'Lifetime Allowance gifts' in this context? But regardless, personally I would rethink your idea of not taking government bonus to buy property.

Are you literally going to buy the whole properties for them for cash? Or just fund their deposit so they get a mortgage for the rest? If getting a mortgage, a HTB or LISA bonus can be used.

I would transfer the HTB into LISA as you have already said you will, because LISA allows greater annual contributions. You then have the choice of either:

- using the accumulated LISA funds (including bonus) to buy property (meaning you use less of your 'own funds' to do it, and have that money available for investment or to reduce the mortgage to a better LTV), or

- not using the accumulated LISA funds and leaving a larger LISA balance for retirement.

It is quite compelling to use the free government money to buy property as it makes an excellent return on investment (in terms of rate of return per year) to put money in an account, get 25% free and utilise that 25% to buy some property within a few years, 'releasing' the bonus. It is a huge boost to the annual rate of savings/investment return over those few years. The alternative is to get a 25% bonus that cannot be released until perhaps forty years later, over which time you acknowledge that it might be lost due to 'withdrawals with an expensive penalty'.

Technically it is the same amount of bonus, received at the same time, but if you leave it in the LISA you have to leave the LISA untouched until age 60 no matter what life throws at you, to avoid losing that bonus (and more) as a penalty. Whereas if you have already removed the bonus for a qualifying reason such as a house purchase, you have removed the risk that it can be lost.

If you are going to fund an entire property for them, then the point is moot, as you can't use HTB or LISA funds to buy a property outright for cash. But if you are going to fund a deposit and leave them with a mortgage to pay for the rest of the property, it would make sense to me to have a government bonus clearing off some of that mortgage straight away (or leaving some of your own funds available for other saving / investment outside the LISA).

From April, I will open the LISA for the 19yr old and will transfer the H2B ISA across to benefit from the additional bonus offered by the Govt. When the 17yr old turns 18 in Nov, I will repeat the same exercise. The H2B ISA is a Cash ISA and I will be looking to open a S&S LISA, but can the Cash ISA money be converted to S&S within the LISA?

Once you have transferred the HTB into a LISA during the 2017/18 tax year in which that facility is available, it is no longer a cash ISA, it is a LISA...

A LISA is a standalone different type of ISA from either a Cash ISA or a S&S ISA or an Intelligent Finance ISA. It is a class on its own. It can hold either cash (suitable for shorter term goal such as funding a property purchase) or S&S (suitable for longer term goal such as retirement). There is no problem transferring the cash from a HTB ISA into a LISA run by an investment provider and then buying investments. Or transferring the cash from a HTB to a LISA run by a bank and keeping it as cash. Once you have got that HTB money inside a LISA (whether with an investment firm or a bank) you can transfer it from one provider to another.

Beyond the first year and added bonus within the LISA, should I then just continue to fund the Stakeholder Pensions, or the LISA, or both? I appreciate the bonus equates to the same thing and the pension allows access at 55 vs 60 in the LISA, but the LISA allows for withdrawals albeit with an expensive penalty.

The bonus does not quite equate to the same thing because the money in a pension is taxable in retirement (well, 75% of it, after the 25% tax free pension commencement lump sum). While LISA money is not taxable in retirement.

Certainly some of the taxable pension money drawn in retirement will effectively get 0% tax as they will have annual personal allowances to utilise, and those are unlikely to be filled by state pension, especially if we are talking about money being taken out at 60 instead of 70 when the state pension hasn't started yet.

However, they have started pension pretty early, and will presumably get pension contributions from themselves and their employers over their long and illustrious careers, yes? That activity would quite possibly give them enough income in retirement to use up most/all of their 0% tax band capacity. So you can assume that every extra £1 you put into their pension now (which gets turned into £1.25) will get treated as 25% tax free lump sum (31p) and 75% taxable at least basic rate (leaving 75p), so they only get £1.06 to keep for themselves. That 6% bonus on the pound invested is nice, but it's clearly not as good as 25% bonus.

So the choice between giving them an extra bit of pension contribution now or LISA now is locking it away in a pension box until retirement with a 6% bonus, or locking it away in a LISA box with a 25% bonus but knowing that if you're really desperate you can break open that box and give up the bonus and get your hands on the cash in your 30s or 40s or 50s. LISA seems more lucrative and flexible.

Forget the difference in age of access as nobody expects personal pension to be accessible age 55 by the time your 18 year-olds get there. State pension age will likely be 69-70+ with personal pension age lagging it by about a decade, round about the same time as the LISA access.

For someone who was already a decent way through their career and didn't have much pension provision, there is more chance of taking the resulting pension income at 0% tax in retirement, so pension can be a good choice and you could say the 'bonus' was pretty much the same. And for someone who was a 40% taxpayer now, the 'bonus' from pensions looks very compelling next to LISA. But for a 19 year old who would only get basic rate relief in a pension, and has a whole lifetime to max out his pension through work and maybe even run up against the lifetime allowance for pension value, the LISA is probably the better choice, if LISA and pension are the only two games in town.

However, stuffing your cash into their LISA or their pension now and locking into that bonus or that tax relief now, are not the only games in town.

You could contribute to normal, non-LISA, S&S ISAs. They could be invested in the exact same type of underlying investments as you would have used in the pension or LISA. They can grow tax free. All they are missing is the bonus. But when your sons start to become higher rate taxpayers at some point later in their careers, they can contribute money from those S&S ISAs into pensions and get a higher rate of tax relief then. Effectively getting a bigger bonus. Or if they never reach higher rate they could still move the money over and get basic rate.

And until then, the funds are fully accessible penalty-free so when they want/need to spend money on their life goals that happen in their 30s or 40s or 50s, (moving up property ladder, travel, bringing up their own children etc) they can do that because their money wasn't all locked away and inaccessible.

So to summarise:

- Fund HTB and LISAs to support property purchase to allow early release of the bonus, assuming they are buying properties rather than being given one for free

- Once the property puchases have been completed and you are looking for where to put the money next, don't focus too much on pensions when the tax relief is only basic rate and they will hopefully reach higher rate at some point. Consider a normal S&S ISA to stash funds for long term (but working-life accessible) investment which can later be moved into pension to capture higher rate relief.

- Perhaps use some LISA rather than exclusively S&S ISA, to capture the known 25% bonus rather than leaving it all un-bonused. The penalty for working-life access is a price to pay for it.

Goes without saying, the exact best mix will differ for everyone.

Forrest87

Thanks, that's really helpful and thought provoking.

At this point, they are both in full-time education with only part-time jobs, so wouldn't qualify for any form of mortgage for many years to come. We are in the fortunate position of being able to be gift them the money to purchase the properties outright using our IHT NRB allowances, and want to do this now to hopefully give us time to survive 7 years and then do it once more for our youngest son (7).

Some way down the line, they may I suppose sell those properties and then effectively be first time buyers and so could use the bonus early, but who knows at this point. We are buying them in trust for them to at least protect us/them a little from any silly life choices.

I've always liked the "locking up" aspect of pensions and similar such as the LISA as I am trying to at least be able to gift them something for their later life when my wife and I are long gone! In essence some protection for them in case their lives don't go the way they/we hope.

That's a good idea about a normal ISA though. I hadn't considered that option. I'll give this some further thought.

Thanks again for your help.