Helping UK new home buyers
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The government is giving away free money! Unlike pensions, this is not tax relief, it is a tax-free annual government bonus. Anyone making the maximum £4,000 contribution each year until age 50 would save a total of £160,000 including £32,000 in government bonuses.
So why is the government doing this
Each initiative from Help to Buy, low interest rate monetary policies and ‘free money’ bonus incentives that encourage home ownership and/or retirement savings could be being introduced as a measure to ensure that most people in the years to come, have either a property and/or some savings that could, if the needs arises, be used to help pay toward their care fees.
The Lifetime ISA became available on 6 April 2017 to help anyone aged 18 to 39 save a deposit on a first home or savings in later life that can be withdrawn for any purpose tax free after they reach 60.
The maximum contribution is £4,000 a year. All contributions made before your 50th birthday receive a 25% government bonus - the government chips in a £1, for every £4 contributed, up to the £1,000 maximum. The money can be withdrawn either to buy a first home for up to £450,000 or tax free after age 60. Any withdrawals before 60, other than for a first home are subject to a 25% government withdrawal charge, in other words the government gets its bonus back and more – 6.25% more to be precise!
How? Well for example, if you invested the maximum of £4,000 (and ignoring any income, interest and growth) If you withdrew it, and closed the account, after 6 April 2018, you would have £5,000 including the 25% government bonus. However a 25% penalty of £1,250 would be applied on the whole £1,250. So you would only get back £3,750, £250 or 6.25% less than you paid in!
The first government bonus will be paid in one lump sum after 5 April 2018 on the contributions made. From 6 April 2018, the government bonus will be paid on a monthly basis.
Two first-time buyers, a couple both buying a first home together, can each save using their own Lifetime ISA, EACH able to accrue £5,000 a year in their LISA. A couple can therefore save £50,000 between them including a total government bonus of £10,000, in just 5 years!
A Lifetime ISA can also be use to save for retirement. Unlike saving in a pension, any withdrawals after age 60 can be taken tax-free, in any amount and are not counted as income. The big difference between a Lisa and ordinary cash or shares ISAs is the government 25% bonus on contributions, up to £1,000 a year on the £4,000 maximum saved.
A LISA can be invested in the same way as traditional ISAs in cash, shares or a mixture of both and all interest and growth is tax free too. It should be noted that all contributions made to a LISA count towards the overall £20,000 ISA allowance for the 2017/18 tax year. So if you invest the maximum £4,000 in a LISA, you can only invest £16,000 in other ISAs. Transfers can be made from existing ISAs into a LISA up to the £4,000 annual maximum and means any transfers will not count towards the current £20,000 annual ISA allowance.
Once you hit 40 you can no longer open a Lifetime ISA. But if you open one before your 40th birthday, it can be added to at any time before the age of 50 to receive the 25% government bonus up to the £1,000 maximum. So anyone aged 39 will be able to save £40,000 over the ten years and get a total £10,000 bonus from the government. Wisely invested, this could amount to a considerable sum at age 60, after which it can be withdrawn tax-free.
The LISA rules have a provision that allows you to retain the bonus and withdraw the money without penalty if you have less than 12 months to live. In the event of death, any LISA money including interest and bonuses can be passed on to beneficiaries without penalty, although it cannot remain in an ISA and will be included in the estate for inheritance tax purposes.
LISAs can be transferred to other LISA providers in the same way as the standard ISAs have been without loss of interest or bonuses.
Help to Buy ISAs were introduced in December 2015 to help first time buyers get on to the property ladder. But the maximum that can be saved is just £200 a month after a one-off £1,000 payment made in the first month. The money accumulated can only be used to buy a first home up to £250,000 (450,000 in London) Help to Buy ISAs are due to be phased out and cannot be opened after 30 November 2019, although you can still add savings to a Help to Buy ISA opened before this date. Importantly, unlike LISAs, the Help to Buy ISA government bonus is only paid after legal completion on a home purchase. The maximum government bonus for a Help to Buy ISA is £3,000 - based on maximum contributions over 4 years 8 months.
It is possible to transfer a Help to Buy ISA to a LISA. Those doing so before 6 April 2018 will get the government bonus on all of it as well as their LISA savings. So in the 2017/18 tax year, it is possible to transfer the value of your Help to Buy ISA (as at 5 April 2017 including any interest) to a LISA. The transfer will not count towards the LISA allowance and will still qualify for the government bonus. But any Help to Buy money transferred in after 6 April 2018 will not get the 25% bonus!
Any LISA savings will affect your eligibility for means-tested benefits, unlike a pension fund, which isn't counted as savings. Also be aware that LISAs will also count as assets in bankruptcy or divorce cases!
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