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Lifetime ISAs guide

edited 14 May 2018 at 12:33PM in ISAs & Tax-free Savings
2.4K replies 370.5K views
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  • It says "So on the surface the amount you put in and get are pretty similar for basic-rate taxpayers."

    How is this true?

    Pension: Earn £100, after-tax £80, put in £80 topped up to £100, take out after-tax £80

    not quite. take out £25 tax-free, and the remaining £75 as a taxable pension. however, you might not pay any tax if you have spare personal allowance at the time (which many pensioners do, since their state pension is less than their personal allowance).

    the upshot is that, at best you get £100 out (when it's covered by the personal allowance).

    but if you're over the personal allowance, you pay 20% on the £75, which is £15, so in total you get out £85.

    and it's even worse if you are a higher rate taxpayer in retirement. however, that is unlikely, if you aren't one while you're working.

    so the likely outcomes are that you might get out either £85 or £100.
    LISA: Earn £100, after-tax £80, put in £80 topped up to £100, take out £100

    Where am I going wrong?
    see above. but you're right that LISA looks better in this case. because the pension will at best give you the same outcome as LISA, and might well be worse.

    however, bear in mind that (as mentioned in other posts) you can lose entitlement to means-tested benefits if you save for retirement using a LISA, while a pension pot is disregarded for means-tested benefits, at least so long as you don't draw from it and are below state pension age. which is relevant for people with little in accessible savings; not an issue for people who already have lots (e.g. in normal ISAs, current accounts, etc).

    also, the arithmetic changes if you have access to a salary sacrifice pension via an employer.

    in this case, if you want to give up £80 of after-tax salary, when you are paying 20% income tax + 12% employee NI (= 32%), then you can sacrifice c. £117.65 of gross salary (because that is £80 / 0.68).

    when you draw the pension, you get 25% of the £117.65 tax-free (i.e. £29.41), and may pay tax on the other 75% (i.e. £88.24).

    supposing you pay 20% tax, that is £17.65 in tax, so you get a net £100 out of the pension. which is the same result as the LISA.

    but you might have spare personal allowance, in which case you will get out the full £117.65.

    so using a salary sacrifice pension, the pension can give a better result than the LISA, and otherwise gives the same result. it can't be worse, except in the (for most people, unlikely) event that you become a higher-rate taxpayer in retirement.
  • masonicmasonic Forumite
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    However, it would seem a bit unfair counting the LISA as assets given that you may not be able to access it penalty free for up to 42 years!
    You might think that, but you might also think it unfair that someone might have their home auctioned off at a large discount to its value if they can't pay their mortgage, or that someone is forced to sell investments that have dipped in value in order to settle a loan. More importantly, it would seem a bit unfair that creditors may suffer a loss in bankruptcy proceedings.

    If someone is considering bankruptcy, then paying a 5% penalty on some savings they use to pay off their debts is probably the least of their concerns.
  • Ads1 wrote: »
    I work for a large company who has a defined benefit pension (final salary). I have been paying in to since I was 18. I will be 37 when the LISA in introduced.
    I already have bought my first home. So would only be able to draw on the LISA when I am 60.

    Would it be worth investing in a LISA? and can you have an ISA as well as a LISA? At the moment I have savings in an ISA for maybe one day moving to a bigger property.

    what marginal rate of income tax do you pay? and does your employer have the option of making AVCs via salary sacrifice?
  • Hello, I have a very quick question.

    If I have a H2B ISA and transfer it into a LISA, then use the LISA for a House Deposit, for that I would claim the 25% bonus. If I continued to use the LISA after using it for the deposit, towards retirement this time, would I still be able to claim a 25% bonus towards retirement or does the bonus stop being paid from when I buy the house? If its the latter and you can't get a double bonus, is it better in the long run to use the H2B ISA to buy a house and get a 25% bonus, then get the 25% bonus from the Gvt on claiming for retirement? Any help with this would be appreciated, thanks.
  • Ed-1Ed-1 Forumite
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    Hello, I have a very quick question.

    If I have a H2B ISA and transfer it into a LISA, then use the LISA for a House Deposit, for that I would claim the 25% bonus. If I continued to use the LISA after using it for the deposit, towards retirement this time, would I still be able to claim a 25% bonus towards retirement or does the bonus stop being paid from when I buy the house? If its the latter and you can't get a double bonus, is it better in the long run to use the H2B ISA to buy a house and get a 25% bonus, then get the 25% bonus from the Gvt on claiming for retirement? Any help with this would be appreciated, thanks.

    The bonus is paid in a LISA regardless of whether you withdraw some to buy a house or not.
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  • I'm just annoyed that this is the second ISA where it excludes people who have ever owned a house before, no mater how small or brief. Surely they could just request that it is only for people who don't currently own a house (and haven't done so for X period of time say).
    I got a mortgage with my ex back in 2012, but we broke up 18 months later and he bought my share off me (for a small amount). Now I cant get access to either of the H2B or LISA for that purpose. I'm sure I'm not the only one in this situation - plenty of people come out of divorce badly and end up in rented...why not give these people a chance?
  • masonicmasonic Forumite
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    I'm just annoyed that this is the second ISA where it excludes people who have ever owned a house before <snip>
    Now I cant get access to either of the H2B or LISA for that purpose. I'm sure I'm not the only one in this situation - plenty of people come out of divorce badly and end up in rented...why not give these people a chance?
    Anyone under 40 can open a LISA, regardless of home ownership.
  • edited 27 March 2016 at 1:29PM
    bowlhead99bowlhead99 Forumite
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    edited 27 March 2016 at 1:29PM
    I'm just annoyed that this is the second ISA where it excludes people who have ever owned a house before, no mater how small or brief.

    If you want to take the bonus out of the account at age 60 and not buy a house, you're completely welcome to do that. This is a flexible account which does not have to be spent on buying a house. So it remains a decent account.
    Surely they could just request that it is only for people who don't currently own a house (and haven't done so for X period of time say).
    You will always get people who have been out of the market for a while and want to get into it again (for example, they have been out of the country for a while but still have substantial assets). Still, you have to draw the line somewhere.

    Otherwise there will be people who sell their million pound portfolio of properties, sit in cash and investment funds for a few years, and then ask for government help to buy a house because houses are expensive and it's not fair that they have to pay the full price to buy a house and if londonlydia owned a flat and sold it in 2013 and is getting free money to help her buy another one, why shouldn't they.

    So, it's much much easier, without the pain of means-testing or counting years before reapplication or having a million miles of red tape and terms and conditions etc, to just draw a line in the sand and say the people we want to help are those who have not had a residential property before. If you get yourself on the property ladder and then decide to get off it again, the tax payer doesn't want to pay you to get back on it again. Because the tax payer didn't tell you to get off it.

    As a taxpayer who bought a house more recently than you (without a free handout), I don't think it's my fault that your last investment didn't work out well for you and you decided not to keep owning the place that you'd bought. Sorry to hear about it, but it's not my duty to get you back on your feet after you make a poor choice of investment or partner.

    If you 'come out of divorce and end up in rented' then you still own the assets you had, subject to a fair allocation. So if the property went up in value and you avoided paying rent to a landlord while married, you have still made money. If instead the property went down in value while you owned it, that would imply that things are getting cheaper rather than more expensive so you don't need a handout to find somewhere in the country to buy again.
  • Hi everyone 😊 Hope y'all are well.

    New to the site and have a couple of questions about LISA's.

    I am not in a position to invest right now as I have a long term illness. However, next year when I turn 40 (before the cut off) my Folks are planning to give me money as an early gift. Can I open an ISA with that money so even if my condition hasn't changed, I won't miss out?

    Also, if you die before you are 60 does the money get paid to your next of kin or will the State pinch it back?

    Any help would be appreciated 😁
  • PlusPlus Forumite
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    ZaberStorm wrote: »
    I am not in a position to invest right now as I have a long term illness. However, next year when I turn 40 (before the cut off) my Folks are planning to give me money as an early gift. Can I open an ISA with that money so even if my condition hasn't changed, I won't miss out?

    I don't think you can. If you've never owned a property you can open a HTB ISA now and that should continue after the LISA is available, but if you're 40 or over on 6th April 2017 then you can't open a LISA to transfer it into. Depending on what you plan to do with it the HTB may or may not be suitable, but I think you can open one and then make minimal or no deposits (subject to the T&C of your provider) until you're in a position to do so - but after which you can only add £200 per month.
    Also, if you die before you are 60 does the money get paid to your next of kin or will the State pinch it back?

    Since it's a savings account the money you paid in is yours, though I'm unclear on the status of the bonus.
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