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5 May 2017
From 6 April 2017, the total amount which can be saved each year into all ISAs will increase from £15,240 to £20,000. Of this, £4,000 can be contributed to the new Lifetime ISA.
On 16 January 2017, legislation creating the new Lifetime ISA (LISA) gained Royal assent. This new type of ISA follows on from the Help to Buy ISA, which became available in autumn of 2015. Like the Help to Buy ISA scheme, the new LISA, has the dual purpose of assisting first-time buyers to gain a foothold on the property ladder and helping them to save for retirement. The LISA is certainly the more attractive of the two accounts as you can invest far more and it benefits from increased versatility:
|NB: At the time of writing, the LISA rules have not been finalised.
Who can take advantage?From 6 April 2017, anyone aged between 18 and 39 will be able to open a LISA. Whilst an individual is under 50 they can contribute up to £4,000 per year and receive an additional 25% government bonus. This means for every £4 contributed, the government will add a further £1 (worth up to £1,000 a year). In addition, couples can both benefit from their bonus when they come to buy their first house together.
LISA contributions will count towards an individual’s total annual ISA contribution limit (£20,000 from April 2017), however any bonuses received do not.
The LISA tax-free funds, including the government bonus, can be used to purchase a first home worth up to £450,000 at any time from 12 months after opening the account.
This 25% ‘unlisted withdrawal’ charge may seem like the Government simply reclaiming the bonus it paid but the charge is levied on the entire LISA funds withdrawn, including any interest paid and investment growth. Consequently, if an individual incurs a 25% withdrawal charge this could mean that they receive back less than they invested. For instance, a £4,000 contribution plus £1,000 bonus, which is followed by a £5,000 ‘unlisted withdraw’, would be subject to a £1,250 charge leaving the saver with £3,750 (£250 less than their initial contribution amount).
In addition, since 6 April 2016 savers have been able to re-invest withdrawals into ISAs if completed within the same tax year. For example, for the new tax year ending 5 April 2018 an individual who contributed an initial £12,000 then withdrew £2,000, would be able to contribute a further £10,000 into the ISA within the same tax year i.e. the £2,000 withdrawn, plus the remaining £8,000 allowance.
It is more complex if an individual withdraws ISA funds from previous tax years and the current tax year. Withdrawals are first treated as coming from the current tax year’s allowance. When an individual withdraws funds that exceeds the amount that they have contributed within the current tax year, the surplus withdrawn is treated as being from previous years. However, when replacing cash, it is the opposite. Funds contributed back in are treated as replenishing previous years until fully replaced, then the current tax year. Again, the funds must all be replaced within the same year as withdrawn.
Many ISA providers do not currently offer this flexibility. There are also certain kinds of ISAs that cannot be flexible, these are Junior ISAs, Help to Buy ISA and any element of a Stocks & Shares ISA that is not in the cash account.