-
Paying bonus monthly is good news for savers
-
But LISA still only right for those committed to house purchase or leaving untouched until retirement
The most significant clarification concerns the Treasury’s decision from the 2018 / 19 tax year to pay the LISA 25% bonus on a monthly basis, rather than deferring until after the end of each tax year. The previous proposal, coupled with the charges levied on customers who withdraw early other than for house purchase, would have created huge disincentives. It also avoids everyone having their bonus invested on a single day each year.
Steven Cameron, Pensions Director at Aegon said: “The Treasury has listened to the industry and will pay the LISA bonus on a monthly basis from the 2018 / 19 tax year. The earlier savers receive their bonus, the sooner it can start earning investment growth or interest.
“If the bonus had been paid only after the end of each tax year, some individuals who withdrew their funds mid-tax year could have faced a 25% loss on contributions which had not benefitted from the Government bonus. We’re pleased the Treasury has removed this major design flaw.”
Example
Under the previous proposals, an individual who paid in £4000 on 6 April 2017 would have received a £1000 bonus shortly after 5 April 2018. If they the paid in a further £4000 on 6 April 2018, their LISA pot would equal £9000. But if they then withdrew their money other than to buy a first home on say 1 January 2019, the Treasury would deduct a 25% charge on the full £9000, or £2,250, leaving £6,750. The deduction is far greater than the £1000 bonus paid.
Under the new proposal, the LISA provider will be able to claim the bonus on the second £4000 at the end of the month, meaning the individual will have £10,000 on 1 January. The 25% exit charge of £2,500 is still greater than the £2000 bonus received, meaning those investing in LISA really should do so only if they plan to use the proceeds for first house purchase or for retirement.
The charge is designed to reclaim the Government bonus plus a small additional sum where the LISA is not used for one of its intended purposes – retirement or first house purchase. Under the previous proposals, some individuals would have been severely penalised.
|
