Lifetime ISAs became available as from 6 April 2017, though there are as yet few providers.
The government had two objectives in introducing the LISA – to assist would-be home owners to accrue sufficient funds to enter the housing market, and to provide an alternative or additional means of saving for retirement. In the latter context, some people will be wondering about the respective merits of personal pensions and LISAs.
Personal pensions offer tax relief on contributions, but apart from the 25% tax-free cash entitlement, withdrawals are subject to tax. LISAs, by contract, offer both a 25% up-lift on contributions and tax-free withdrawals. Provided that the conditions are satisfied, the government will contribute £1,000 for every £4,000 invested.
The conditions attaching to LISAs are that the funds must be used either to purchase a first home for less than £450,000 or, if encashed for any other purpose, that this is not before the age of 60. In addition, investors must be aged between 18 and 40. However, anyone who starts a LISA before the age of 40 can continue contributing until the age of 50.
Limits on maximum contributions still favour pensions. The £4,000 p.a. maximum which can be invested in a LISA compares with £40,000 for pensions (reduced to £10,000 for people who have already started drawing benefits)
So, who should be considering investing in LISAs? Certainly, first-time house buyers Also people wishing to provide for retirement and who do not have access to workplace pensions.
The self-employed are a principal target audience for LISAs. However, the current maximum age restriction of 40 is seen as inappropriate and may be one of the reasons why more providers have not yet entered the market.
An influential lobby group of banks and asset managers has been formed which has pointed out that according to the Office for National Statistics, 43% of the self-employed are aged over 50, compared with only 27% of those in employment. And significantly, one of the few providers already offering LISAs reported that nearly one fifth of applicants in the weeks following the launch were aged 39.
LISAs are unlikely to be attractive to higher rate taxpayers, who currently enjoy the great benefit of tax relief on pension contributions at their highest marginal rate. However, proposals for the equalisation of tax reliefs have been discussed and remain on the cards.
To complete the picture, we must not forget standard ISAs, for which the maximum annual contribution is now the very meaningful £20,000 p.a. per individual.
If, as suggested, the market for LISAs is the first-time home buyer and the self-employed, it is equally clear that other categories of taxpayer should be seeking to maximise their pension contributions while current limits are in force; and at the same time, taking their cue from the government’s wish to reduce the cost of pension reliefs, to build up meaningful portfolios of stocks and shares ISAs