We know from talking to our clients that many of you are concerned about the long-term financial health of your children or grandchildren. Many of you are making one-off gifts of capital, or regular gifts, to help them fund their first property purchase or build up adequate savings for retirement.
Many young people have made use of the Lifetime ISA (LISA). Some have used it to augment their pension savings (not always the best course of action, but it is appropriate in some cases). More importantly, many have used it to fund the deposit on their first house. The Government are now proposing to consult on the introduction of a replacement product. We show below the key features of the existing plan, and the proposed changes we may see.
Current Lifetime ISA key features
- Available to applicants aged 18–39 (must be opened before age 40)
- Contributions: up to £4,000 per tax year, up to age 40
- A 25% government bonus is added to contributions at the point of investment (up to £1,000 per year)
- The fund can be used to fund the purchase of a first home (up to £450,000) or, from age 60, to provide retirement benefits
- Withdrawals for purposes other than funding a first home or retirement usually incur a 25% charge
Proposed changes
- The replacement product will only be available to first-time buyers
- The Government bonus will only be paid at the point of house purchase. This would mean a lower return from the product because the bonus will not be rolling up with the investment
- Likely removal of early withdrawal penalties
A call to action
HMRC have announced that it is possible to open a LISA under the current rules until the new product is launched. As yet, we do not know the outcome of the consultation. However, in the event that the new product is not as attractive as the old, we are recommending that anyone saving for their first home should open a current LISA and make a minimum contribution.
Having taken this action, they will have a choice going forward. They can either continue investing in their current product or move to the new plan if that is to their advantage. We can advise on a suitable current LISA product if required. In most cases, we will be recommending a stocks and shares LISA. Unlike the cash version, this should keep pace with the increased inflation we are likely to encounter because of the current geopolitical issues.