Prospective homeowners using a Lifetime ISA to save for their deposit are being warned to beware of lesser-known rules surrounding the products which could catch them out.
Investment platform provider AJ Bell has flagged up seven ‘quirks’ which it said have been tripping people up since the tax-free savings vehicles were made available.
Lifetime ISAs were launched in 2017 for first-time buyers to save for a deposit or to help with retirement planning. Savers can invest up to £4,000 a year in the products, there is no tax on the interest and the Government will provide a 25% top up to the sum.
However, there are restrictions which AJ Bell is highlighting to ensure savers do not lose out on the benefits.
Laura Suter, personal finance analyst at AJ Bell, said: “Many first-time buyers are banking on the Lifetime ISA, and its generous 25% Government bonus, to help boost their deposit money. However, the small print throws up some tricky quirks that savers need to be aware of.”
40th Birthday deadline
Money must be deposited into the account before your 40th birthday. This means that not only must the account be opened, but you need to have paid in some funds or it will be closed by HMRC.
Tax year deposit
It’s important, said Suter, you deposit the money into the account in the same tax year in which it was opened. If you create an account in March 2018, you should ensure you have made a payment by the following April 5 or it will not be classed as officially opened.
Suter explained: “This is not the case with other ISA or SIPP accounts so investors could understandably assume this was not the case.”
Keep your details up to date
The Government will not pay the 25% bonus if there are any discrepancies between the details recorded on your account and the information held on you by HMRC.
Suter explained problems could arise if, for example, someone had changed their name after they got married and had forgotten to update this with HMRC, or if they simply made an error on their form.
12 month minimum
Lifetime ISAs must be opened and funded 12 months before you buy your property. So if you are looking for a quick deposit saving fix, this is not the product for you.
The rule is in place to prevent people from paying money in, immediately claiming the bonus and withdrawing the money.
Cash v stocks and shares rule
Lifetime ISAs can be invested into either cash or stocks and shares but you can only pay into one or the other in a tax year.
In fact, if you have opened two Lifetime ISAs the second one you opened will be closed and the money you deposited returned, regardless of the amount in there, Suter warned.
She added: “This is particularly important to remember if you are transferring from one Lifetime ISA you’ve opened earlier in that tax year to another.”
Transferring money
There is a £4,000 limit on how much you can deposit into your Lifetime ISA each year. This includes money which is transferred in from another ISA too.
The only exception to this rule is if you are transferring from one Lifetime ISA to another Lifetime ISA.
Bonus money may take eight weeks
Because of the way the bonus is administrated, it might take at least six weeks – and possibly up to eight weeks – for the Government bonus to be paid.
Suter said: “This is only a problem for those who are at the stage of buying a house, and had banked on the latest month’s bonus money to go towards their house purchase.”
She added: “The rules of the Lifetime ISA differ quite a bit to other ISAs, meaning that it’s easy for savers to be caught out, leading to delays, admin headaches and potentially their home purchase being stalled.
“It’s vital that savers are aware of these quirks so they don’t fall foul of the rules.”
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