15th September 2016
The new Lifetime ISA will avoid one of the most controversial aspects of the current Help to Buy ISA – the government bonus will be available to borrowers when they exchange contracts not on completion.
The Help to Buy ISA has come in for sharp criticism because the bonus on the ISA does not help borrowers pay for their deposit or at least not directly but can only be used to pay down the mortgage debt.
The Government and to a lesser extent banks had been criticised for claims it could help with a deposit, disappointing many savers when it become clear that was not directly the case. This became clear earlier this summer as the first buyers wanted to use their Help to Buy Isa to buy their first home.
With the new Lifetime ISA due to launch next April, the Treasury has just published a technical update.
The Lifetime ISA, effectively replaces the Help to Buy Isa with a dual purpose product i.e. it helps first time buyers get on the housing ladder or helps them save for retirement.
The Help to Buy ISA has the same bonus or uplift of 25% but on smaller maximum of £3000 rather than the LISA’s £4000.
The investment industry has also welcomed the decision to pay a monthly bonus on contributions after April 2018 though the first year it will be paid after 12 months.
Steven Cameron, Pensions Director at Aegon 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.” (Aegon has provided a worked example below.)
Investment firm Hargreaves Lansdown has urged potential investors to familiarise themselves with some of the details, particularly that they cannot access their investment and bonus until at least April 2018 or probably a few months later when the bonus is paid. The bonus will be a £1000 for contributions of £4,000.
A Hargreaves Lansdown update says: “The LISA cannot be used for house purchase for the first 12 months so the first time eligible, penalty free savings will available will be 6th April 2018. However the bonus for 2017/18 is unlikely to be paid for a few months after April 2018, so those wanting to use their LISA value plus bonus for property purchase in April, May or possibly June 2018 may well be disappointed.”
Danny Cox, chartered financial planner, Hargreaves Lansdown says: “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 2 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 2 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.”
What has been clarified?
Under the previous proposals, an individual who paid in £4000 on 6 April 2017 would have received a £1000 bonus shortly after 5 April 2018. If they the paid in a further £4000 on 6 April 2018, their LISA pot would equal £9000. But if they then withdrew their money other than to buy a first home on say 1 January 2019, the Treasury would deduct a 25% charge on the full £9000, or £2,250, leaving £6,750. The deduction is far greater than the £1000 bonus paid.
Under the new proposal, the LISA provider will be able to claim the bonus on the second £4000 at the end of the month, meaning the individual will have £10,000 on 1 January. The 25% exit charge of £2,500 is still greater than the £2000 bonus received, meaning those investing in LISA really should do so only if they plan to use the proceeds for first house purchase or for retirement.
The charge is designed to reclaim the Government bonus plus a small additional sum where the LISA is not used for one of its intended purposes – retirement or first house purchase. Under the previous proposals, some individuals would have been severely penalised.