The proposed approach to regulating the promotion and distribution of the Lifetime ISA (LISA) has been announced by the Financial Conduct Authority (FCA).
Announced in the 2016 Budget, the LISA is aimed at those under 40 who which to save or invest on a flexible basis in order to fund a deposit for a first home or save for retirement. The Government intends for it to be available from April 2017. Details within the Budget confirmed certain details about the LISA, including its £4,000 limit on individual contributions per tax year.
LISA Basics
One of the LISA’s dual purposes is to assist first-time buyers in purchasing a residential property, providing the LISA has been held for a year or more. With Help to Buy ISAs only being available to open until 2019, this new Lifetime ISA may provide a welcome alternative to those looking to purchase a home.
For the purposes of a LISA, a first-time buyer is someone who has never owned a property. Even if only a share of a property was owned previously, this still classes as ownership, both inside and outside of the UK.
LISAs are treated as individual products meaning that couples saving for a home are able to have one each. If neither individual has owned a property before, both can open an account and save into it.
For first-time buyers, the property they intend to buy must be within the UK and cost a maximum of £450,000. If the house surpasses this cost, 25% of the amount withdrawn from the LISA is cut. The price ceiling for the LISA is actually higher than for the Help to Buy ISA, which in London reaches £450,000 but anywhere outside the capital is restricted to a maximum of £250,000.
Money saved for the purpose of buying a home can be withdrawn once the LISA has been open for 12 months. There is however, an exception for those with a life expectancy of less than this period. In such a case, the funds plus the bonus will be available to withdraw penalty free. The usual lump sum pension rules apply in relation to ill health and evidence may be needed from a medical practitioner.
When used to purchase a property, any money will go directly to the consumer or solicitor as opposed to the consumer. All of that saved, including the government bonus, is available to the consumer at exchange. Prior to the purchase taking place, the ISA provider should be informed about transferring the funds across to the individual responsible for the new home’s conveyancing.
If a property purchase falls through, the funds return to the bank or building society and will not impact the amount a consumer is able to contribute in that particular tax year. If the account is not used for property purchase, it will not close. As its other purpose is for retirement savings, the Lifetime ISAs underlying intention is that savers will eventually return to the account for this purpose.
LISA and Help to Buy
The relationship between the LISA and the Help to Buy ISA has been a point of contention and comparatively speaking, it is important to note the characteristics each possess.
Consumers who possess a Help to Buy ISA will also be able to save into a LISA once they become available to open in 2017. However, if they wish to purchase their first home, the 25% government bonus may only be used from of the accounts.
If the LISA is used to purchase the home, the bonus from the Help to Buy ISA is taken off, but the remainder of savings plus interest, is still available to go towards the purchase.
If the Help to Buy’s bonus is used, to use the LISA in conjunction will incur a penalty, although the bonus will be saved for retirement savings.
Any funds saved in an existing Help to Buy ISA can be transferred into a LISA once they become available.
LISA finer points
The limit of £4,000 will still be within the general ISA allowance of £20,000 from the 2017/18 tax year. This limit also encompasses cash, stocks and shares as well as Innovative Finance ISAs.
Each year, the Government will provide an extra 25% to these contributions. This amount can be invested immediately as from 2018/19, the 25% will be added monthly. Had the additional amount been added at the end of the year, this could have cause investment lag when compared to a relief at source (RAS) pension contribution. For the 2017/18 year, this lag may still occur due to the bonuses being applied at the end of the year.
The additional 25% provided is also very similar to the RAS basic rate relief, although this is referred to as 20%.
Those under 40 will be able to open a LISA from April 2017, with contributions able to added until the individual reaches 50.
Money can be withdrawn penalty free when the individual has reached 60. However, if they wish to withdraw before and the money is not go towards a first-time home, a penalty will be incurred.
A key message from the announcement of the LISA has been the early access penalty of 25%. Despite this penalty, it does give the LISA an element of flexibility that a pension does not possess and initially the deductions seem to return the client to parity, prior to the bonus. The initial deduction is of 20% which ‘takes back’ the Government’s additional bonus. However, a ‘small additional charge’ is also applied which results in a further 5% being taken.
For certain assessments of value, the 25% charge to access the funds will need to be taken into account.
These include:
- Welfare and social care means tests
- Bankruptcy
- Divorce
- Direct debt recovery
Many of the rules surrounding the LISA will largely be similar to those surrounding the normal ISA:
- Per tax year, only one LISA can be contributed to
- LISAs are only available to UK residents as well as Crown employees and their spouses/civil partners
- From certain tax-advantaged employee share schemes, it will be permissible to transfer shares
- Investments which are currently suitable for stocks and shares of cash ISAs are able to be held within an ISA
- Contributions to a LISA must be from the individuals own money
- If funds are withdrawn from a LISA, this will not increase the amount that can be contributed during the tax year
- Transferring between LISA providers will be permitted and the amount available to transfer has no limit
- Upon death, additional permitted subscriptions for a spouse or civil partner will be allowed – the money will not however be in the LISA
Although its aim is to assist consumers to save, this does not mean that risks do not exist. New rules aim to curtail these risks and make sure consumers are protected.
At the point of sale, firms will need to give specific risk warnings which will include reminding customers of the importance of ensuring an appropriate mix is retained in the LISA. Consumers will also have to be reminded by firms of early withdrawal charges or any other charges.
Also, following the sale of the LISA, the FCA has proposed that the firm should provide a 30-day cancellation period.
