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What you need to know about the new Lifetime ISA

Anyone between 18 and 40 will now be able to save towards a first home or their retirement and get a huge 25% bonus from the government thanks to a new Lifetime ISA, one of the big announcements in the 2016 Budget.

It could make a big change to how we save and plan for the future, potentially giving young people a vast sum of cash when they reach 60 years old or buy their first home.

Here’s what we know so far.

How will the Lifetime ISA work?

For every £4 someone pays into the Lifetime ISA, the government will top it up by £1. A maximum of £4,000 can be saved each year to receive the bonus. When you reach 50 years old you can no longer pay money into the ISA and the bonus will also stop.

The bonus will be tax-free, meaning you get the full amount.

Since it’s also an ISA, you’ll also be able to earn interest on the money in the account as set by the ISA provider.

When can you get the bonus?

The bonus will be paid each year into the account to allow for interest to be earned on it, but there are restrictions on when you can access the money.

If you are using it to buy your first home, you can withdraw your money and the bonus after 12 months.

If you aren’t buying your first home you have to wait until you are 60 to receive the bonus. Take your money out before then and you’ll lose the 25% extra, and interest earned on the bonus payments. You’ll also have to pay a 5% fee.

The government has said they will look into greater flexibility in accessing the savings, similar to the American 401 accounts which let people borrow money from their savings and pay it back in full.

Withdrawals, including the bonus, will be allowed before 60 if you are diagnosed with a terminal illness.

Who can open one?

Anyone over 18 and under 40 years old will be able to open one. If you want to use it towards a home, it must be your first property and cost less than £450,000.

When will Lifetime ISAs be launched?

The first Lifetime ISAs will be available from 6 April 2017.

What if I already have an ISA?

Each new financial year you’re able to open a new ISA or keep paying into an existing one.

You’ll be able to pay money into the new Lifetime ISA alongside another ISA as long as you don’t go over the annual limit of £20,000 for both.

If you have opened a Help to Buy ISA, you’ll be able to transfer the funds into a Lifetime ISA and still receive the 25% bonus on those savings when you buy your first home.

Is it better than the Help to Buy ISA?

The main difference between the two is the Lifetime ISA lets you buy a house worth up to £450,000 anywhere in the UK. The Help to Buy ISA has a limit of £250,000 outside London.

However, the first possible payment date for the new Lifetime ISA for homebuyers is April 2018. With a Help to Buy ISA you can withdraw your money and get a bonus as long as you have saved £1,600, which can be reached in just a couple of months if you put in the maximum deposit and monthly saving, making it a better option for anyone planning to buy in the next two years.

There’s also no upper age limit with the Help to Buy ISA, as long as you are buying your first home. The Lifetime ISA is restricted to under 40s.

Does it replace a pension?

Though the Lifetime ISA could help you save for your retirement, having a pension has many benefits including employer contributions and tax-relief so it might be best to think of them as working together.

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  • Cliff smith / 7 April 2016

    Wish I could get this sort of return on my current private & company pensions. Not to mention the reduced State pension I am entitled to under the new rules. I have followed all government advice over r5 years only to be short changed. Despicable