At the start of December, the Help-to-Buy ISA was withdrawn for new investments. The Lifetime ISA (LISA) is now the only ISA plan offering incentives for first-time buyers. However, anyone who started a Help-to-Buy ISA before 1 December can continue to contribute up to £200 a month. They have until 1 December 2030 to claim their Help-to-Buy bonus.
The LISA was launched in April 2017 and is different from the traditional ISA:
- It can only be taken out by somebody aged between 18 and 39, with contributions payable up to age 50.
- The maximum investment is £4,000 per tax year (which counts towards the £20,000 overall ISA limit).
- There is a 25% government bonus payable on any contribution. This means that a maximum of £1,000 is added if the £4,000 annual limit is met.
- Withdrawals can be made penalty-free at any time after 12 months if the proceeds are used to buy the investor’s first home. That home must cost no more than £450,000.
- Withdrawals are also penalty-free from age 60 onwards.
- Any other withdrawals (other than on terminal illness) are subject to a penalty of 25% of the amount withdrawn.
The withdrawal penalty is a controversial feature. That’s because it claws back more than just the government bonus. HMRC collected over £9m in penalties from LISA encashments between April 2018 and November 2019.
Not so lovely Lisa…
Steve saved £80 a month in a cash LISA for 18 months from April 2018. He gained a £20 government bonus on each contribution. In November 2019 he was forced to cash in his LISA after being made redundant. Low interest rates meant that the face value of his LISA savings was £1,832. However, there was a 25% (£458) penalty on encashment, which meant he received £1,374, which is £66 less than he had saved.
With the Help to Buy ISA (which had no penalties) gone, there is a risk that more young savers will end up paying LISA penalties. Taking advice is a wise precaution, even for simple savings plans.
The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.