What you need to know about the Lifetime ISA

5 April 2017

Ollie Smyth, Financial Adviser at Walker Crips Wealth Management

Like so many savings vehicles, the LISA will be useful for many but not for all. The great appeal is the government’s pledge to top up investments by 25%, but advisers need to ensure clients are fully aware of the product’s restrictive conditions before making a commitment.

These may include:

- Potential penalties for withdrawing funds outside strict conditions

- Inheritance Tax implications

- In some circumstances, negligible benefits over effective pension planning

As a retirement planning tool, the LISA could be viewed as a supplement to pensions, but certainly not a replacement. Higher and additional rate taxpayers are still able to claim further relief via pension contributions over the 25% top-up available within a LISA. Additionally, pension savings can be accessed from age 55 rather than having to wait until age 60 with a LISA.

The LISA remains subject to normal ISA rules and would be included in any Estate calculations for Inheritance Tax, unlike pensions. Though pension death benefits do fall under the remit of income tax should death occur after 75 years of age, effective intergenerational planning can effectively mitigate this to a large extent.

Funds from LISAs must also be drawn from one of two scenarios to avoid penalties which undermine the effectiveness of the vehicle. The funds must be used to help buy a first home, up to a value of £450,000, or funds can be withdrawn from age 60. If you have funds remaining from the house purchase within the LISA, these may be rolled over until age 60.

Withdrawing funds outside of these two scenarios will result in an encashment penalty of 25% on the funds drawn. Although this means that funds are accessible if required, advisers must be reasonably assured that clients will draw from the LISA for the prescribed usage to achieve the full benefit.

That being said, the LISA does have a significant advantage over pension funds in that drawings, provided they meet with the previously mentioned criteria, do not attract income or capital gains tax which would create a very tax-efficient pool of savings in retirement. For those able to contribute to both a pension and a LISA as part of their retirement plan, the advantages are clear.

Parents looking to save for their children may wish to use their annual gift exemption of £3,000 to fund a LISA for both intergenerational planning and to give them a head-start.

As a result, those seeking advice on a LISA purchase should be made fully aware of the advantages and drawbacks of the product by their adviser before committing.

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It is important to remember that the value of investments can go down as well as up and it is possible to get back less than you invested, especially in the early years. Past performance is no guarantee of future returns and interest rates and dividends are variable and cannot be guaranteed in the future. Any tax treatment mentioned is based on personal circumstances and current legislation which is subject to change. In the event of a client having a complaint about our services we will do our best to resolve that complaint promptly and to the client's satisfaction. However if we are unable to do so, the client may have the right to complain to the Financial Ombudsman Service. Further information can be found on the Financial Ombudsman Services's Website at www.financial-ombudsman.org.uk.