New Lifetime ISA
From April 2017, people under 40 will be able to open a “Lifetime ISA (LISA)”. These will run alongside the normal cash and shares ISAs. Contributions into a LISA up to the age of 50 will be part matched by the government with a 25% bonus.
Up to £4,000 may be saved into a LISA each year, out of a revised total ISA allowance from April 2017 of £20,000 (2016/17: £15,240). Funds from a help to buy ISA will be transferrable into a LISA from April 2017. Based on the rules as announced, it would seen to be a generally beneficial idea to do this, as with a help to buy ISA you cannot contribute to a normal ISA in the same tax year, and thus your unused ISA allowance is lost, although individual consideration is of course necessary.
Funds from a LISA may be used to buy your first property (costing up to £450,000) or to use in retirement (defined as from age 60). Although you can withdraw funds for any other reason, this would result in a loss of the bonuses already paid plus any associated income/gains on these.
In any case, funds taken from a LISA will be free of income or capital gains tax, including the government bonus.
The LISA is designed to run alongside the current pension regime, although initially the government consulted on such a system replacing the current pension system entirely
Planning point: The 25% contribution from the government is equivalent to the basic rate tax relief on pension contributions. However there is no extra relief for higher rate or additional rate taxpayers. Basic rate taxpayers may therefore consider it great value for money to get the same upfront tax benefits as a pension but to access the entire pot tax free upon retirement (as opposed to 25% tax free in a traditional pension). Higher rate and additional rate taxpayers may weigh more carefully the lesser upfront tax relief against the tax free status later in life.
Planning point: For people with little or no pensionable income (e.g. people living from property income or during loss making years), this effectively means that you can put £7,600 gross into personal pensions and LISAs at a cost of just over £6,000, with the balance of £1,520 topped up by the government even if you pay no tax in the year.
Planning point: For people who have maximised their pension savings for the year or lifetime, this is an opportunity to get a small amount of further savings with the benefit of a government contribution.
Planning point: It is unclear whether the significant Inheritance Tax benefits enjoyed on undrawn pension benefits will also apply to LISAs.
Planning point: If you are nearing 40 next April, it may be worthwhile to open a LISA with a small one off contribution to keep your options open for the next 10 years.