The government has announced that Lifetime ISA savers will be allowed to put the bonus towards a deposit for their first home when they exchange contracts.
The Lifetime ISA is set to be introduced in April next year and will allow anyone younger than 40 to put away up to £4,000 a year until they are 50. For every £4 people save, the government will give them back £1, a bonus of up to £1,000 a year.
It can be used by first-time buyers to fund a deposit for a property or taken tax free at 60.
The Treasury said that savings and the bonus held in a Lifetime ISA will be available to buyers when they exchange contracts.
The government’s Help to Buy ISA scheme recently came under attack after it emerged that first-time buyers won’t be able to use the 25% bonus to fund a deposit for a house until the property has been purchased.
The Help to Buy ISA is due to end in 2019. Savers with a Help to Buy ISA will be able to transfer into the Lifetime ISA from April next year or continue saving into both – but you will only be able to use the bonus from one to buy a house.
The savings and bonus in a Lifetime ISA can be used towards a deposit on a first home worth up to £450,000. Accounts are limited to one per person, so two first-time buyers can both pair up and double their bonus.
The Treasury also said that the 25% bonus on contributions made into the Lifetime ISA would be paid monthly from 2018 and not annually.
David Hollingworth, associate director at London & Country Mortgages, said: “The Lifetime ISA will offer another option to those saving toward the purchase of a new home. As with the Help to Buy ISA, the 25% bonus from the government will be welcomed by first-time buyers struggling to amass a deposit. It should help to get them in the habit of saving and alleviate anxiety that house prices will only rise quicker than they can manage to save.
“It’s crucial that savers understand the mechanics of each scheme, as has recently been highlighted in reports of confusion when the Help to Buy ISA bonus can be paid. Because it is payable at completion the bonus is not available as part of the deposit at exchange, which should not represent a big problem as long as understood at outset.
“The Lifetime ISA bonus will be available immediately so could be put toward the deposit at exchange if desired, not just at completion. The bonus is also paid monthly so savers benefit from interest or growth on the bonus as well. Savers may also like the greater flexibility of the Lifetime ISA which allows contributions of up to £4,000 per annum rather than the drip feed of £200 per month of the Help to Buy ISA.”
Neil Lovatt, product director at Scottish Friendly, said: “The news that the government bonus will be paid monthly to Lifetime ISA customers is a great development and the industry finally got the affirmation we need from the government to commit to the development of the Lifetime ISA product.
“The confirmation that tax relief will be paid monthly means that the product is mirroring pensions even more. It’s likely that, just as with pensions, providers will pre-fund tax relief which means that customers won’t need to wait until HM Revenue and Customs make the payments to their Lifetime ISA to receive the benefit. As a result, this not only looks like a vote of confidence in the Lifetime ISA but a further indication that they are here to stay and they are aiming to muscle out pensions.”
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