Four need-to-know facts about the Lifetime ISA
The Lifetime ISA (LISA) launched in the new 2017/18 tax year and to date, there are just three investment platforms (Hargreaves Lansdown, Nutmeg and The Share Centre), and one cash provider (Skipton Building Society) offering the product. The Foresters Friendly Society has also today launched a With Profits LISA.
It allows people aged 18 to 39 to take out a longer-term tax-free account to help them buy their first home and save for retirement at the same time. Savers can put in up to £4,000 each year until the age of 50 and the government adds a 25% bonus to the savings, up to a maximum of £1,000 annually. See YourMoney.com’s Lifetime ISA guide for more information.
As the LISA can be used for pension savings, some pension rules are mirrored in the governance of the LISA, while in other cases there are some very distinct regulations.
Therefore, anyone considering opening a cash or investment LISA specifically for pension savings must be aware of the following four facts about the product and how it interacts in terms of current divorce, bankruptcy, inheritance tax (IHT) rules as well as benefit entitlements in the future.
Kate Smith, head of pensions at Aegon, said: “As LISAs form part of the ISA regulations, the same rules apply to LISAs as they do to ISAs. LISAs are not pensions. This means that just like ISAs, LISA’s aren’t protected in the same way pensions are.”
1) The Lifetime ISA and divorce
Both LISAs and pensions count as assets in the event of divorce. For many people, their pension will be their biggest asset after the family home and it tends to be divided during the proceedings.
Most divorce cases are settled out of court, but if the amount is disputed the judge will consider whether each party can maintain their current lifestyle as they did during the marriage. See YourMoney.com’s Pensions and divorce: what happens and what should you consider? for more details.
2) The Lifetime ISA and bankruptcy
Pensions are normally protected on bankruptcy. However, because LISAs are classed as savings they can be taken to pay creditors in bankruptcy. If a LISA is accessed before the age of 60 as part of a bankruptcy, you will incur a penalty charge of 25% on the whole amount, including any interest, income or capital gains.
The only exceptions are if you buy your first property, you are terminally ill with less than a year to live, upon death, or if you access the funds after the age of 60.
The only other exception is in the first year where the 25% charge won’t be applied but you won’t receive the government bonus.
Even if someone has started to take an income from a LISA after age 60 it can be taken into account in cases of bankruptcy.
3) The Lifetime ISA and inheritance tax
Pensions don’t usually form part of the individual’s estate so no IHT is normally payable.
In addition if you die before the age of 75, any unused pension funds are passed on tax-free to your loved ones. If death occurs after age 75, tax is payable at the beneficiaries’ marginal income tax rate when they take the income.
A LISA forms part of the deceased’s estate and normal IHT rules apply, subject to 40% tax on anything over £325,000 or £425,000 if the estate – the value of property, money and other possessions – is left to children or grandchildren upon death.
4) The Lifetime ISA and future benefit entitlement
Saving in a workplace pension doesn’t affect entitlement to benefits, while saving into a LISA for your pension may affect a claim for means-tested benefit.
Smith explains: “Saving into a pension doesn’t affect entitlement to pre-State Pension Age benefits. But just like ISA savings, LISA savings are taken into account for means-tested benefits, such as universal credit. There are strict criteria for entitlement to universal credit, including not having savings above £16,000.”