Lifetime ISAs guide

masonic

DragonQ wrote: »

But is there much advantage to having both? Sure I could put in £4k a year into a LISA but then I could also just put £4k extra into my pension.

If you plan to draw down your pension, then there may be an advantage to having both if you are a basic rate taxpayer and plan to draw down more than your tax free allowance per year. The excess could be withdrawn tax free from the LISA, so you would be looking at paying net 12% NICs on the LISA contribution, vs 20% on the way out of the pension. This assumes salary sacrifice is possible and there is no top-up available from the employer (either matching or employer NICs).

bowlhead99

koru wrote: »

For most people who already own a house, there's no reason to do a LISA if you could do a pension instead.

That seems nonsense. Of course there are sensible mainstream reasons for normal average earners to use LISA instead of a pension contribution with only basic rate relief.

For someone who is only a basic rate taxpayer, the gross up from tax relief is only a maximum of 25% and you only get to keep all of that "free money" if you are able to draw every penny out of it at zero percent tax within the limits of your annual personal allowance once you get to your late fifties onwards, without displacing other income (from employment, state pension, mandatory workplace pension etc) which you are getting in those years.

Compared to that option of "maximum achievable bonus of 25%, contingent on making sure you only access the money by very carefully managing the timing of drawdown across multiple tax years in retirement" which is what's offered by a pension contribution being made by a basic rate taxpayer... LISA is useful. With LISA you get the 25% bonus with no strings attached (beyond the lock-up age of 60); in later life you will be able to draw it out very flexibly without regard to your other sources of income or marginal tax rate.

For higher rate taxpayers, pension is more compelling, relatively, so there's fewer reasons to use LISA. Just the emergency access opportunity which some might value, or the risk that lifetime pension allowance is hit preventing employer contributions.

For basic rate taxpayers now who expect or aspire to be higher rate taxpayers later in their career, they can use normal S&S ISAs now with the intention of contributing the proceeds later into a pension to grab higher rate relief on the contributions made in those years. For such a person, S&S ISA beats S&S investments inside LISA because of penalty free access. But of course for that person, a pension contribution with basic rate relief now is worse than either (1) S&S ISA now high rate relief pension later or (2) S&S LISA now with penalty and high rate tax relief later.

So, telling a basic rate taxpayer that there is no reason to use LISA if you could do pension instead, is wide of the mark IMHO. If the pension they would be "giving up" is one that gets them NI relief through salary sacrifice and free employer contributions, then sure, pension has an advantage. But for the majority of people, who are already getting their max free employer money and don't have salary sacrifice options, so are just comparing private pension to private LISA, it is blinkered to write off the LISA.

adytas

Hi,!

I am a British citizen by naturalisation. I have been leaving in UK for 10 years now and I am settled here. As a prospective first time buyer, I am contemplating to put aside into Lifetime ISA for a home. Although very unlikely, if after buying the house at some point in the next !5, 10, 15,!etc. years I need to leave the UK, what happens with the house? Can I sell it ? What is stipulated in the official government lifetime ISA terms and condition? Where can I find them?! Is there a time limit?!
Live is unpredictable and I feel that there should be some guidance regarding these circumstances.!
!
Kind regards

eskbanker

adytas wrote: »

Although very unlikely, if after buying the house at some point in the next !5, 10, 15,!etc. years I need to leave the UK, what happens with the house? Can I sell it ?

Yes.

adytas wrote: »

What is stipulated in the official government lifetime ISA terms and condition? Where can I find them?!

http://www.legislation.gov.uk/uksi/2017/466/regulation/31/made
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/603261/ISA_Lifetime_ISA.pdf

adytas wrote: »

Is there a time limit?!

No, if using a LISA for a first-time property purchase then theoretically the property could be sold the next day without falling foul of any rules.

Don't take 'lifetime' too literally!

koru

bowlhead99 wrote: »

For someone who is only a basic rate taxpayer, the gross up from tax relief is only a maximum of 25% and you only get to keep all of that "free money" if you are able to draw every penny out of it at zero percent tax within the limits of your annual personal allowance once you get to your late fifties onwards, without displacing other income (from employment, state pension, mandatory workplace pension etc) which you are getting in those years.

Thanks for pointing out my monumental error! I was forgetting that LISA withdrawals are tax free, whereas pension withdrawals are generally taxable (with various exceptions). So I completely withdraw my comment. For most basic rate taxpayers a LISA is better than a pension.

Katie-Jane

I'm sorry if this has already been asked, but do we know what the penalty will be fore withdrawing? That's what I liked about the HTB ISA; if for example my car broke and I desperately needed money i could withdraw from it at no fee.
So for example I save in the LISA for 2 years, I have £8k and the government top up to £10k. Something happens for example I lose my job or whatever and I need the money; I obviously lose the £2k bonus, but what else do I lose? 5%, 10%, 25%?

Thanks,

Katie x

eskbanker

You lose 25% of the amount withdrawn, which, as pointed out in the article that this thread is about, equates to losing the applicable bonus plus another 6.25%.

So, if you'd paid in £8K and had it topped up to £10K, then if you closed the whole thing you'd receive £7.5K back, or if you just withdrew, say, £1,000 you'd actually only receive £750.

Further detail at 9B.34 in https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/603261/ISA_Lifetime_ISA.pdf

Ed-1

Katie-Jane wrote: »

I'm sorry if this has already been asked, but do we know what the penalty will be fore withdrawing? That's what I liked about the HTB ISA; if for example my car broke and I desperately needed money i could withdraw from it at no fee.
So for example I save in the LISA for 2 years, I have £8k and the government top up to £10k. Something happens for example I lose my job or whatever and I need the money; I obviously lose the £2k bonus, but what else do I lose? 5%, 10%, 25%?

Thanks,

Katie x

Given that's one of the core terms of the account, it's probably been asked over 2,000 times by now!

The withdrawal penalty for a non-qualifying withdrawal (first-time house purchase, age 60, terminal illness) is 25% of the amount withdrawn.

The Government when George Osborne was Chancellor were considering allowing people to borrow against their Lifetime ISA where you wouldn't incur a charge if the funds were fully repaid (giving you flexibility to withdraw while maintaining the incentive to keep saving). The current Government with Philip Hammond as Chancellor said in September 2016 that they were continuing to consider this flexibility. However, as yet there has been no action and with the Lifetime ISA offering such as damp squib from providers I doubt they'll make any changes to the current policy unless the market starts to grow more quickly.

Katie-Jane

Thanks guys, sorry I jumped ahead and asked the question before I read all the thread!! :-/ I'l know for next time!

So basically the LISA is the best option if you're not looking to buy in the next year? And only put money in the LISA that you are certain you can afford to, as the penalty is quite high for withdrawing.

Got it.

Thanks :-)

truereddevil

I'm in abit of a dilemma and not sure what i should do basicially on sunday i turn 40yrs old which by then i won't qualify for a lisa so i need to make this decision by tomorrow

I am currently in a first time buyers scheme where the government pays to which i have 5,000 in with halifax, i have a mortgage meeting on monday with halifax so would prefer not to move it

If they offer me a mortgage on monday i will probably use the money from the first time buyers towards my deposit if i do this will i still be able to open a lisa tomorrow with the bare minimum pay in and keep that going as an investment towards my pension, just looking for advice really on my best options

Thanks for any help