More Isa savers face losing their £1,000 bonus
Savers who open a new Lifetime Isa when it’s launched on April 6 could lose up to £1,900 in bonuses from the Government if they are not extremely careful. The Lifetime Isa allows individuals to save for retirement or to buy their first home. They can put up to £4,000 a year into the Isa and receive a 25pc government top-up on the money.
While the bonus is paid monthly after the first year, for technical reasons it must be paid annually in that first year.
This means savers who invest the maximum £4,000 in the first year and then buy a house before that 12-month bonus arrives will lose the £1,000.
What’s more, existing savers using the Help to Buy Isa are being encouraged to transfer that money into the Lifetime Isa in the first year. If savers transfer within the first 12 months the Help to Buy money does not count towards their annual Lifetime Isa savings limit. Any Help to Buy transfers after the first year will count towards the £4,000 annual cap.
However, savers who transfer their Help to Buy Isa money will also not receive the bonus if they buy a property in the first 12 months, the Treasury has confirmed.
Instead, they will have to go back to their Help to Buy Isa provider to request the bonus, creating a complex web of administration.
Those who had saved £4,000 into a Lifetime Isa but bought a property in the first year would miss out on £1,000 of government money, while those who had the maximum £3,600 saved in a Help to Buy Isa, transferred it to their Lifetime Isa and were not aware of the need to reclaim their bonus would stand to lose another £900.
Danny Cox of Hargreaves Lansdown, the investment firm, said: “You’ve got to be a fortune-teller to make sure you get it right. It is really important to think about these things carefully and plan ahead.
“If you plan to buy a property in the first 12 months from the Lifetime Isa launch you are better leaving the Help to Buy Isa money where it is.”
He advised savers who are unsure about when they are going to buy a property to wait until near the end of the 2016-17 tax year to transfer their Help to Buy Isa money.
The Lifetime Isa has already been criticised by the savings industry. Savers can withdraw their money penalty-free if they are buying their first property, are aged at least 60 or in the case of terminal illness.
However, if they take money out at any other time they face a 25pc exit charge.
The penalty has been criticised as a tax on investment growth as the 25pc applies to the whole value of the pot at the time of withdrawal. This means the Government could take back more than it initially contributed.
The flaws with the Lifetime Isa are akin to those of the Help to Buy Isa, where home buyers discovered that they could not use the bonus at exchange of contracts.
Buyers of shared-ownership properties, who included readers
Complexities in the rules mean that some savers could lose their top-up. Laura Suter explains
such as Kamil Price-Latorre and Laura Gardiner, have also been caught out when it transpired that many could not get the bonus for their home purchase if the total value of the property exceeded the scheme’s limits.
This applies even if the chunk of the home being purchased falls within the price cap, which is £250,000, or £450,000 in London.
Jason Hollands of Tilney Bestinvest, the investment company, said many providers might not be able to offer the Lifetime Isa at the time of launch.
Fund shop The Share Centre is the only provider to have confirmed it will offer the product on April 6, although acknowledged “there is lots to get right with Lifetime Isa”.
Nationwide is the biggest Isa provider to announce that it will not offer the Lifetime Isa, saying the exit charges are excessive.
Laura Gardiner and Kamil Price- Latorre were caught by Help to Buy Isa errors