The Lifetime ISA: Is It a Help or Hindrance for Young Savers and Their Families?

son-1397821_640The new ISA hits the UK. But, what is it and how does it help you? Here are what professional financial experts know that you need to know.

What Is It?

Most people are familiar with the idea of a pension scheme. You pay money into the pension, or your employer or the government helps you, and then you collect a regular paycheque when you retire.

A lifetime ISA will help you if you’re young and you need flexibility in your savings. It helps you simultaneously save for a first home and for your retirement, and you don’t have to choose one over the other. It’s designed to work with the grain of existing ISA products currently available. It uses the simple and popular ISA model, and allows contributions post-tax but investment growth on savings are tax-free, as are future withdrawals.

If you’re under the age of 40, then you’re eligible to open a lifetime ISA and you can contribute up to £4,000 per year into it. The government then gives you a 25% bonus on your contributions at the end o the year.

This means if you save the maximum, then you’ll get a £1,000 bonus on your savings from the government. Savers can then make lifetime ISA contributions and get a bonus from age 18 up to 50.

Your maximum matching over your lifetime, with contributions would equal £160,000, with £32,000 of that coming from government matching and £128,000 coming from your own contributions.

Tax-free funds, which include the government bonus amount, can be used to buy your first home, as long as that home isn’t worth more than £450,000 within 12 months after opening the account.

Savings Outside of the ISA

Because the ISA is heavily slanted towards retirement savings, many people wonder what they should be doing for other non-retirement or home purchases. This is an excellent question. You should also be saving a small amount of money outside of your ISA for things like vehicles, computers, and holidays.

Some people even use services, like MoneyBoat, to help them pay for these things.

Opening a Lifetime ISA

You can open a Lifetime ISA starting April 2017. Individuals can open them as long as they are between 18 and 40. When you open the account, it’s very similar to the process for opening a regular ISA.

An ISA manager, will apply normal account opening processes. You will need to provide your name, National Insurance number and date of birth. You will also be able to open more than one account, but will only be able to pay into one ISA per year.

Saving Money

Saving money into your account is simple. You can make contributions with your own cash. And, qualifying investments in a Lifetime ISA are the same as for a cash or stocks and shares ISA.

You can transfer your Lifetime ISA within 30 days between various providers if you want to get a better deal on your investments or aren’t satisfied with the provider’s service.

When you do this, you will have to abide by a few rules. Any contributions into a Lifetime ISA need to sit with the overall £20,000 ISA limit on contributions for the tax year. You will also be limited on your government bonus amount. This limit is 25% of your personal contribution up to a maximum of £1,000 on a £4,000 contribution. There is no monthly contribution limit. You can contribute to your ISA until you reach age 50.

The Bonus

The government pays a bonus equal to 25% of the amount you contribute throughout the tax year. This means that for every £1 you contribute, the government contributes £0.25. This bonus is capped at a maximum of £1,000 per tax year.

Withdrawals Of Your Money

You may make withdrawals for two reasons. First, you may use up to 100% of your savings to make a first time home purchase. This includes the government bonus amount. You can still get the benefit from compound growth because the government bonus is paid every year.

There is a minimum holding period of 12 months from the account opening before you can make a withdrawal which includes the government bonus amount. If you’re buying your first home, then you and your spouse can each use a Lifetime ISA and both can benefit from it to buy a home.

The other way you can withdraw money from the ISA is for retirement withdrawals and income. You must do this at age 60 or older.

Nicholas Krauspe is the Head of Operations at MoneyBoat.co.uk, a London based alternative finance company providing unsecured consumer credit to residents of the UK. Nicholas has over 10 years of operations and management experience in the consumer finance sector.

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