In the recently released budget statement, chancellor George Osborne has implemented a Lifetime ISA. The Lifetime ISA will provide a flexible way for people under the age of 40 to save tax-free.
With this lifetime ISA, people under the age of 40 can put money in and get a government bonus and use it to either buy their first home or save for their retirement.
Here is how a Lifetime ISA works:
From April 2017, anyone under the age of 40 will be able to open a Lifetime ISA and save up to £4000 each year. For every £4 you save, the government will give you a bonus of £1. That means that if you put in £4000, the government will give you £1000 every year until you are 50.
Use the Lifetime ISA to buy a new home:
- your savings and the bonus can be used towards a deposit on a first home worth up to £450,000 across the country
- accounts are limited to one per person rather than one per home – so two first time buyers can both receive a bonus when buying together
- if you have a Help to Buy: ISA you can transfer those savings into the Lifetime ISA in 2017, or continue saving into both – but you will only be able to use the bonus from one to buy a house
OR you can use the new Lifetime ISA to save for retirement
- after your 60th birthday, you can take out all the savings tax-free
- you can withdraw the money at any time before you turn 60, but you will lose the government bonus (and any interest or growth on this). You will also have to pay a 5% charge
With the lifetime ISA, you don’t have to choose between your first home and retirement.
Under this scheme, the government is giving you money to do both. For basic rate taxpayers, the lifetime ISA bonus is equivalent to the tax relief on the contribution you get in a pension. But unlike a pension, you won’t pay tax when you withdraw money. This makes this new Lifetime ISA far more superior than a pension in my opinion.
The government also mentioned that they are currently consulting the industry on whether you can return the money to the account to reclaim the bonus so it is both generous and flexible. This will make it similar to America’s 401K.
People who have taken out the help to buy ISA will be able to roll it into the new Lifetime ISA and keep the government matching.
You can get more information on the newly announced Lifetime ISA, here.
ISA Limit – Increases to £20,000
If you are over 40 years old, don’t worry too much as the government is from 6 April 2017, the ISA limit will increase from the current £15,250 to £20,000 a year. This means that you can save and invest £20,000 a year without having to pay tax on the capital gains and dividends you make under this ISA umbrella.