Planning for the future can be daunting for a young person. It can be a struggle to save up a deposit for a first home and putting money aside for a pension can even seem impossible.
To help young people save for the future, the Government are launching a new Lifetime Individual Savings Account (LISA). Announced in the Budget 2016, the LISAs are a new tax-efficient savings scheme available from 1 April 2017.
To make sure you're up to date on what a LISA is and how it works, we're taking you through the basics.
What is a LISA?
A LISA is a savings product designed to help people buy their first property or retire. You can open a LISA if you're between the ages of 18 and 40.
You can pay a maximum of £4,000 into a LISA each tax year. At the end of the first tax year, the government will add a 25% bonus. So if you pay in the maximum of £4,000, you'll receive an extra £1,000 from the Government before interest.
From April 2018, the Government will pay this bonus monthly. You will benefit from compound interest this way, which is when interest adds to your total and you then earn interest on it too. The maximum bonus you can get is £32,000.
How does it work?
Just like any other ISA, you can invest the money in cash or stocks and shares. Cash LISAs tend to pay out the same as ISAs – interest rates are currently about 1%. Or you can invest the money in stocks and shares, which might have higher returns but at a greater risk.
You don't have to pay Income and Capital Gains Tax on what you make. However, the money has to go towards buying a house or helping you retire. To use the money to buy a house, you can’t have owned a property before and the home you buy can’t cost more than £450,000.
This limit is higher than the one for a Help to Buy ISA outside of London. You and your partner can each use your own LISAs to buy a house together – meaning you'll have double the contributions.
Alternatively, you can withdraw money from a LISA and use it for your retirement once you're over the age of 60. Keep in mind though that you won't receive any employer contributions with a LISA as you would do with a workplace pension.
Can I withdraw sooner?
You can only withdraw the money from a LISA without facing a penalty to buy a first home, once you're over 60 or if you have a terminal illness.
You'll incur a 25% exit charge if you withdraw earlier than this. This breaks down as 20% to recover the bonus and an additional 5% to make up for the investment growth on the bonus. You won't face an exit charge in the first year (2017/2018).
And what about a Help to Buy ISA? Help to Buy ISAs are available until 30 November 2019. You can choose to open a LISA alongside a Help to Buy ISA but you can only use the Government bonus from one to buy your first home.
During the 2017/18 tax year, you can transfer any savings built up from a Help to Buy ISA to a LISA and still save an extra £4,000. You can still transfer after 6 April 2017 but it will use up some of your LISA contribution limit for that year.