• Government has published a Savings (Government Contributions) Bill and explanatory notes
• Cap on annual contributions of £4,000 confirmed
• Detail on when early withdrawals escape penalty clarified
• Option of borrowing from LISA dropped
The Lifetime ISA was announced in the March Budget as a new form of ISA which would allow individuals to save for a first home and / or for retirement. Like ISAs, contributions will be paid from after tax pay but the LISA will also attract a Government bonus of 25% equivalent to the tax relief on pension contributions for those paying basic rate tax. Proceeds can be taken tax free to purchase a first home of up to £450,000, after age 60, if terminally ill or on death. However, the Government bonus including interest or growth plus an additional penalty of 5% is deducted if money is withdrawn in any other circumstances.
Aegon welcomed the aims of the Lifetime ISA but like other providers, recently questioned if it is feasible to have the product in place by April 2017 as many details remain unknown.
What’s new today:
The publication of the Bill provides more information on how the LISA will operate but full details will not be published until the Bill reaches Committee stage in Parliament.
Commenting on the latest insights, Steven Cameron Pensions Director at Aegon said: “The publication of this Bill confirms that the Government is sticking with its timetable of allowing Lifetime ISAs from next April. It also firms up on Government intentions for various aspects of the product design, including the 25% Government bonus on contributions up to £4000 each year but full details have not yet been provided, meaning an April launch remains highly challenging.
“Under the LISA, an individual will be able to make withdrawals tax free from a minimum age (intended to be 60), on purchasing a first home, if terminally ill or on death. While the Government was considering extending the list of ‘tax free’ events, the Bill suggests it will initially stick with the core list, while leaving the door open to adding other circumstances at some later stage.
“If withdrawals are taken at any other time, HMRC will reclaim the Government bonus plus interest and an additional charge equivalent to a further 5% of the withdrawal.
“The Government was also known to be considering allowing individuals to borrow from their LISA, without losing the Government bonus if repaid within certain rules. This seems to have been dropped.
“The original plan was for LISA providers to claim the bonus for individuals after the end of each tax year. There is no indication of the Government bowing to industry pressure to allow this to be claimed monthly, allowing individuals to benefit earlier from the bonus.
“The Government has always been clear that the bonus would be paid on not more than £4000 each year, equating to £1000. The Bill confirms that individuals won’t be allowed to pay in additional sums above £4000, which would not have attracted a bonus. This will allow LISA providers to send out a simple message that any contributions to LISA attract the bonus and will also simplify administration.
Cameron concludes: “We are pleased that the Government has avoided adding complexity to the core design and has kept LISA simple. We now urgently await the remaining details.”
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