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25 Jan 2017

Understanding the new Lifetime ISA

With the government set to launch a new type of tax-free savings account - the Lifetime ISA - in a few months´ time, The Mirror recently offered a brief overview of what the account entails, and whether savers should open one.

As the publication notes, the Lifetime ISA was announced in 2016, in George Osborne´s final Budget as Chancellor of the Exchequer. Designed to help savers under the age of 40 save towards their first home or their retirement, it offers savers the opportunity to receive a substantial top-up on their contributions.

Savers will be able to pay up to £4,000 per year into the account, either in regular payments or as one lump sum. These savings will then be topped up by the government by 25% annually, then monthly as of April 2018.

Therefore, those who save £4,000 will receive an additional £1,000 from the government. Furthermore, with the government offering to pay that bonus until savers reach the age of 50, those who open an account aged 18 and save the maximum amount will earn £32,000 - not to mention interest on balance savings.

There are two main benefits to the Lifetime ISA: saving for a property or saving for your retirement. If you cash it in before the age of 50, you must put it towards a deposit on a home in order to receive the bonus - and you cannot have owned a property previously. However, if you withdraw the money after the age of 60, the money can be spent however you wish.

There are many different ISAs currently available, including the standard ISA - whose annual allowance is rising from £15,240 to £20,000 from April 2017 - the Innovative Finance ISA, Help to Buy ISA, and Junior ISA, which allows you to save £4,080 a year tax free.

The key difference between the Lifetime ISA and the Help to Buy ISA is that the latter can only be used towards a property costing up to £250,000, or £450,000 in London. Also, the Lifetime ISA needs to be open for at least 12 months before it can be used to buy a property; while there is no such time restriction with Help To Buy.

So far, institutions such as Halifax, Santander and Hargreaves Lansdown have confirmed they will be offering Lifetime ISAs when they launch in the spring. The UK´s largest building society, Nationwide, has decided not to offer one.

Copyright M2 Bespoke 2017

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