Treasury to alter how Lifetime ISA bonus is paid
Earlier this year, the government announced that a new kind of ISA – the Lifetime ISA (LISA) – will be launched in April 2017 to help young people buy their first home and save for retirement.
It will allow savers to contribute £4,000 each tax year and the government will top it up with 25% – £1,000 each year. See YourMoney.com’s All you need to know about the Lifetime ISA guide for further details of the scheme.
However, the Treasury has today published an update on how the LISA will work, including the fact that in the 2017/18 tax year, the bonus will be added at the end of that tax year, while from 2018/19, the bonus will be paid on a monthly basis.
Steven Cameron, pensions director at Aegon, welcomed the move. He said: “The Treasury has listened to the industry and will pay the LISA bonus on a monthly basis from the 2018/19 tax year. The earlier savers receive their bonus, the sooner it can start earning investment growth or interest.
“If the bonus had been paid only after the end of each tax year, some individuals who withdrew their funds mid-tax year could have faced a 25% loss on contributions which had not benefitted from the government bonus. We’re pleased the Treasury has removed this major design flaw.”
Key clarifications and updates for the LISA
Here are some of the key changes, summarised by Hargreaves Lansdown, from today’s updated note:
- The bonus is to be based on the contribution, not on the value. So a £4,000 contribution to a stocks and shares LISA will receive a £1,000 bonus, even if the value has fallen or risen in the interim.
- LISA can’t be used for house purchases for the first 12 months so the earliest a first-time buyer may be able to obtain the bonus for the scheme will be from 6 April 2018.
- 25% penalty on the value of an amount withdrawn, except where the saver’s over 60, bought their first property when under the age of 40 or in the event of terminal illness, with less than a year to live.
- Unlike the Help to Buy ISA, the bonus will be available for exchange of contracts, not completion.
- Only cash or shares from maturing SAYE schemes will be permitted contributions.
- The door has been left open for borrowing from LISA, according to Hargreaves Lansdown.
Danny Cox, chartered financial planner at Hargreaves Lansdown, said: “Making the LISA values plus bonus available at exchange of contracts will help first time buyers’ cash flow and it is a better system than the Help to Buy ISA as the cash will be ready when needed. First time buyers need to take into account the timetable for the first annual bonus in their planning otherwise they risk a shortfall at exactly the wrong time.
“We expect considerable interest from the 500,000 or so Help to Buy ISA holders, looking to transfer their values across to LISA in 2017/18. This will give them wider choice, the benefit of stocks and shares options, higher subscription levels and bonuses paid sooner.
“The door has been left open to add borrowing as an option. This would complicate the LISA product and potentially risk savers bypassing the penalty to access their savings plus bonus.”