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Budget 2016 Enjoy the savings of a lifetime – The new Lifetime ISA

The new Lifetime ISA will be available to those under the age of 40 on 6 April 2017.

The maximum annual contribution limit will be £4,000 and investors will receive a 25% top-up to the amount contributed at the end of each tax year. This means that if the maximum sum of £4,000 is paid in, the government will pay a top-up of £1,000. Contributions can continue to be paid and attract these top-ups up until age 50.  As with the standard ISA, investors will be able to choose to hold their Lifetime ISAs in either cash or investments.

Investors will be able to withdraw the funds held within their Lifetime ISA at any stage in order to purchase their first home, which must be valued at below £450,000. Alternatively, they can elect to leave the funds invested and withdraw the monies free of tax at any point after age 60. Withdrawals for other reasons may be permitted; however, the funds accrued from the top-up payments will be returned to the government and a 5% penalty charge applied.

This new investment vehicle is a welcome addition to the investor’s armoury. Those who have yet to purchase their first home will be the primary beneficiaries of the scheme; however, it is likely to be of interest even to those who already have their own home. The decision around whether to invest in a pension, ISA, Lifetime ISA or a combination of all three, will be primarily driven by the investor’s objectives and the timescales around when they plan to withdraw the monies from the investment.

Those who feel that they will require access to their capital prior to age 60, for example to repay a mortgage or purchase an investment property, are likely to continue to be attracted to pensions and standard ISAs, both of which allow free access to the funds prior to age 60. However, for those who are unlikely to require access prior to age 60, if funds are limited, the new Lifetime ISA will become a more attractive investment than the standard ISA. This is due to the 25% top-up payment applied to all contributions paid before age 50. In either scenario, pensions remain attractive as a result of the income tax relief achieved at investment and access to the 25% tax free lump sum from age 55.

For the self-employed, especially those who are basic rate taxpayers, who do not receive any employer pension contributions, investments into the Lifetime ISA are likely to take priority over pension investments. The top-up payment will be of the same benefit as the tax relief achieved on a pension contribution and all funds will be able to be withdrawn tax free.

Balancing the merits of these various investment schemes will require careful consideration of long term objectives and lifetime planning. Each scheme provides valuable tax benefits and which is the most appropriate will depend on the level of funds available and when individuals are likely to wish to access their money.

In addition to the Lifetime ISA, a significant increase to the standard ISA allowance will be effective from 6 April 2017. The maximum investment will rise from the current £15,240 to £20,000 providing investors with additional scope to shelter their savings from income and capital gains tax.

There is plenty to think about; please contact Michael Lapham or your usual Mercer & Hole contact if there is anything you would like to discuss.

 

 

Date: 17th March, 2016
Author: Michael Lapham

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