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In this year’s Budget, the Chancellor focussed his attention on supporting the next generation and is extending his freedom and choice mantra from the 2014 Budget towards younger people.
George Osborne delivered good news to savers in the form of a significant increase in the annual ISA allowance to £20,000 from 6 April 2017, but it’s important to be aware that this includes anything you plan on saving into the brand new Lifetime ISA (LISA), which the Chancellor introduced.
Many people were expecting the emergence of a new Pension ISA, but instead the LISA took centre stage. On the surface it sounds more like a pension than an ISA, when you take into account the Government’s plans to add £1 to every £4 you save, which bears a striking resemblance to basic rate tax relief on pension contributions, so this could be seen as introduction of a Pension ISA via the back door.
Surprisingly, the LISA will only be made available to individuals aged between 18 and 40 and will allow up to £4,000 each year to be saved, primarily used for the purchase of your first home, or towards retirement.
This dual purpose ISA won’t replace the Help-to-Buy ISA (HTBI) just yet though. Whilst many first time buyers began saving via this method from 1 December 2015, the Government has confirmed that they will remain available until November 2019. Savers wishing to buy their first home can use either the bonus from the HTBI or the new LISA but not both and it is reported that transfers from the HTBI will be allowed to the LISA upon launch.
The opportunity to save in one place for both retirement and towards a first home is a flexible and welcome change, but thought needs be given towards the timeframe and the investment strategy you wish to adopt. Often the timeframe associated with saving for a house purchase is much shorter than those saving for retirement, not to mention how much is needed to fund a deposit on a property.
The 25% Government bonus will only be paid up to the age of 50 and if the savings are to be used for retirement purposes they cannot be withdrawn until the age of 60, with the proceeds being paid free of tax.
Savers wishing to make withdrawals from the LISA for purposes other than a house purchase or at retirement should be careful as they will miss out. For all other withdrawals, the 25% bonus plus the interest or growth earned will be returned to the Government, along with a 5% exit charge, so think before you take the plunge and don’t be blinded by ‘tax free’ headlines.
Armstrong Watson Financial Planning is an independent financial adviser and has Financial Planning Consultants across our 15 office locations. Contact us to discuss your requirements on: 0808 144 5575 or email us: email@example.com.
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