For young people in the UK, saving up for a deposit to get on the housing ladder can seem impossible. Planning for the future and saving for a pension feels even further out of reach and it’s one of the reasons why so few people in their twenties and thirties have any money set aside.
Chancellor George Osborne is hoping to change this after he announced the new Lifetime ISA as part of this week’s Budget, a tax-free way to save for under-40s. Younger people will be able to put money aside every year and receive a bonus from the Government. Let’s take a look at how the account will work.
Buying a house
With the Lifetime ISA, under-40s will be able to save up to £4,000 a year tax-free. They’ll get a Government bonus of 25% on this, meaning the maximum yearly bonus they could net is £1,000. The bonus will be added every year up until savers’ 50th birthdays.
The amount you can save in a Lifetime ISA is separate from your standard annual ISA limit so you could save into both, if you have the funds, that is. The ISA limit is set to rise to £20,000 from April 2017. Lifetime ISAs will be available to open from April 2017, so younger savers have just a year to wait before they can benefit from the account.
Any savings and bonus in the Lifetime ISA can be used to put towards a first home, as long as the property is worth £450,000 or less. If you’re looking to buy a home with your partner, you’ll both be able to open a Lifetime ISA and put savings from these accounts towards a property together.
If you have one of the Help to Buy ISAs that the Government launched last year for first-time buyers, you can still open a Lifetime ISA. You’ll be able to roll your savings from the Help to Buy ISA into your Lifetime ISA or continue to save into both separately. However, you’ll only be able to benefit from the bonus on one of these accounts when you’re buying a house. And keep in mind that you can't use the bonus until after your property purchase completes, so you can't use it for your housing deposit.
Make sure that if you’re planning to merge a Help to Buy ISA with a Lifetime ISA that you do this next year. After the end of the 2017/18 tax year, if you want to combine a Help to Buy ISA into a Lifetime ISA, this will eat into your Lifetime ISA limit for the year, so you won’t be able to save as much.
Saving for the future
According to the Chancellor, young people currently have to make the choice between saving for a housing deposit and putting money aside for a pension. With the Lifetime ISA, they’ll be able to do both as you can continue to save up for your retirement after you’ve bought a house. You’ll be able to access this money tax-free after the age of 60 as one lump sum.
If you wanted, you would be able to take out money from your Lifetime ISA before your 60th birthday. However, you would lose the Government bonus you’d accrued as well as any interest on this and you’d also have to pay a fee of 5%. So if you think there’s a possibility you’d need to access the funds before you turn 60, it’s probably best avoiding saving them into a Lifetime ISA.
Want to know what else the Budget could mean for you? Find out in our Budget 2016 round-up.