Financial planner Charles Calkin shares his views on the new Lifetime ISA and argues that it might offer a tax-efficient way for parents and grandparents to reduce their IHT liability and help family members to get on the housing ladder.
Saving for a first home is a tough challenge and the Lifetime ISA gives anyone over 18 and under 40 the opportunity of a hand-up from the government. A free £1,000 gift for every £4,000 has to be worth considering.
Many young people have a choice between saving for a home or a pension. While it is always good to get into the discipline of saving for a pension – and especially if your employer is matching any contributions – the priority should be getting securely on the housing ladder. After all, if you have paid off a mortgage by the time you reach retirement you will not need as much pension income.
The Lifetime ISA focuses on both savings challenges and that gives it some nice flexibility. It offers you as much benefit saving for a home as you would get from contributing to a pension (unless you pay tax at higher rates). That sounds attractive. But it is only £4,000 a year, there are few providers and there are some prickly restrictions.
You will incur a 25% charge on withdrawals used for anything other than a first home deposit or pension. (The only exception is if the saver is terminally ill or has died.)
For London-based buyers the constraints of only being able to buy a property for less than £450,000 might be difficult – ridiculous though that may seem to people who do not have to contend with London property prices. Even outside London, where the limit is £250,000, some buyers may struggle.
I have a few concerns.
I think it is important that investors think carefully about where their LISA is invested. If they are in cash alone they run the serious risk of inflation eroding the value of their savings and house prices running ahead of them. If they take too much risk – especially as they near the point of purchase – they are exposed to a drop in markets hitting them at precisely the wrong time. So it is important to take advice. The longer you have to save the more risk you can afford to take. You might consider a global equity fund or a multi-asset fund with a high exposure to equities if you are more than seven years away from an anticipated purchase but bring down the risk the nearer you get to the event.
Some older householders who qualify for a LISA and are already on the property ladder may be confused into saving into a Lifetime ISA for their pension when they would be better off contributing to a workplace pension with matched contributions from their employer. This is particularly true if they pay taxes at higher rates. If you can salary sacrifice into a pension you also save the National Insurance element. For the time being at least therefore, a pension should still be the first port of call for retirement saving for higher earners.
It would not surprise me if this turned out to be part of a long-term strategy by the Chancellor to bring an end to the pension regime and merge it with a less generous ISA regime. That might sound shrewd politically but it has added a level of complexity to the product that will affect its take up. Many of Theresa May’s ‘Just About Managing’ voters who might benefit from this are likely to be put off.
Potential benefits for older clients
For some of our clients the LISA could be a tax effective way to help give qualifying adult children or grandchildren a start on the housing ladder. Making maximum contributions from the age of 18 and investing wisely it is possible to accrue a useful amount over a few years.
Tax treatment will depend on individual circumstances and is always subject to change, so taking advice to maximise these planning opportunities is crucial. For grandparents it can be a smart IHT planning strategy. If you can afford to give regularly, providing funds for your grandchild to invest into a LISA – up to £333.33 a month – and take advantage of the normal expenditure rules, this should not count in your normal gifting allowances.
Think of it like this – if you give the money when you die it could be liable to 40% inheritance tax. Giving it this way you potentially reduce your IHT liability and the recipient gets an extra 25% free. Do this for ten years and you’ll have given £40,000 that is worth £50,000 to your grandchild through the LISA regime, but could be worth only £24,000 after IHT if this was given as a legacy.
You can find out more about the Lifetime Individual Savings Account (LISA) at the HMRC website.
Published 19 May 2017
You should not act on this content without taking professional advice. Opinions and views expressed are personal and subject to change. No representation or warranty, express or implied, is made of given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions.
In the event that you incur a Lifetime ISA government withdrawal charge, you may get back less than you paid in. By saving into a Lifetime ISA instead of enrolling in, or contributing to, a qualifying scheme, occupational or personal pension scheme, you may lose the benefit of your employer’s contributions (if any) to that scheme, and your current and future entitlement to means tested benefits may be affected.
The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. Fluctuations in interest rates may affect the value of your investment. The levels of taxations and tax reliefs depend on individual circumstances and may change. You should be aware that past performance is no guarantee of future performance.