The money you save in a Lifetime ISA can be used to buy your first home. But if you want to buy in London, you might be restricted by the house value limit.
The Lifetime ISA (also known as a LISA) was announced by the government last year as a new, flexible way for people to save money – and be rewarded for doing so. The LISA will be available from 6th April for people aged 18-39 and offers a lucrative bonus.
However, the limitations on how and when you can access the money are strict, meaning it may not be the best option for everyone.
What does the Lifetime ISA offer?
The LISA allows you to save up to £4,000 per year tax-free, and benefit from an annual government bonus of 25% on your savings contribution until you’re 50. That means you can save a maximum of £5,000 per year towards your first house or your pension, and be paid tax-free interest on everything.
You can withdraw the money when you are aged 60 or over, or to buy your first home. However, if you plan to use the money to buy a house the value of the property can’t exceed £450,000. This applies regardless of where it is in the country, including London. If you decide to take the money out of your ISA without adhering to these restrictions there’s a hefty price to pay – you’ll lose the entire bonus paid to you on the amount you withdraw and there’s a 5% exit charge.
Is this feasible for Londoners?
If you live in London or have set your sights on buying your first house in the capital, the £450,000 limit on the property value might restrict the size of house you’re able to choose: in July 2016 the average London house price was £484,716, with the average terraced house in the capital priced at £503,185.
London flats and maisonettes would just make the cut, at an average 2016 price of £425,732.
Other areas of the UK are substantially cheaper: the average house price in the South East was £313,315 in July 2016 and just £129,750 in the North East. However, you can’t use the LISA to purchase buy-to-let properties – so if you choose to use it to buy ‘out of town’, you’ll need to live there too.
The Lifetime ISA allowance applies per person, so things do become significantly easier if you’re choosing to buy a property with a partner or friend as this means you’ll be able to save for your deposit faster. Also, the money from your LISA can be used to purchase property under a shared ownership scheme, provided the full value of the property falls within the £450,000 limit.
The £450,000 house value limit means that if you’re likely to want to buy your first home in London or other expensive pockets of the UK, you may find the Lifetime ISA a bit restrictive, particularly if you’d like to buy something larger than a flat or maisonette.
Although you can use your savings to buy a property worth more than £450,000 you’ll lose the government bonus, all interest earned on the extra money, and pay a penalty. However, for savers in other parts of the country where there is a wide range of houses that are likely to stay under the £450,000 capping the Lifetime ISA is a very good option.
But that doesn’t mean a LISA isn’t a good deal for Londoners. Remember, you can use it to buy your first home – or as another way to save for retirement. So it might still be right for you.
Nutmeg will be offering a stocks and shares Lifetime ISA in the 2017/18 tax year. Register your interest on our Lifetime ISA page and we’ll keep you informed.
As with all investing, your capital is at risk. ISA rules apply. Tax rules may change in the future.
A Lifetime ISA may not be right for everyone. You must be 18–39 years old on or after 6th April 2017 to open one. If you need to withdraw the money before you’re 60, and it’s not for the purchase of a first home up to £450,000, or a terminal illness, you’ll pay a 25% government penalty. So you may get back less than you put in.
Compared to a pension, the Lifetime ISA is treated differently for tax purposes. Higher rate taxpayers may be better off contributing to a pension. If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you will lose the benefits of the employer-matched contributions.
If you are unsure if a Lifetime ISA is the right choice for you, please seek independent financial advice.