Government clarifies how the Lifetime ISA will work

The Government has published its Savings (Government Contributions) Bill which sets out legislation describing how the Lifetime ISA (LISA) will work.

 
It confirms the Lifetime ISA scheme will be rolled out from April 2017 and those aged between 18 and 40 will be able to open an account. 
 
Savers can pay in up to £4,000 per year until they are aged 50 and the Government will top up accounts with a monthly 25% bonus, to a maximum of £1,000 per year. 
 
The money can be put into either cash accounts or stocks and shares, though the bonus is only paid on the amount paid in, not on interest or gains from investment. As with pensions, it can’t be guaranteed that there won’t be a loss if the stocks and shares route is chosen.  
 
What can I do with the money from the Lifetime ISA?
 
The Lifetime ISA will allow individuals to save up money for a house or for retirement. It can be drawn out to buy a house worth up to £450,000 or when the account holder either reaches 60 or becomes terminally ill. 
 
When it comes to buying a house, it has benefits that the Help to Buy ISA doesn’t, such as allowing more money to be put in and a bigger bonus, plus money can be withdrawn at the point of exchange as opposed to having to wait until after completion.
 
But what about those thinking they would rather save into the Lifetime ISA than a pension? 
 
Whilst having more options when saving for retirement is always a good thing, the Lifetime ISA probably shouldn’t replace pensions savings. Those who are employed (rather than self-employed) and saving into a company pension enjoy the benefit of employer contributions, which will outweigh the 25% bonus.
 
However those who are self-employed will now have a viable way to accumulate a retirement nest egg with the Government’s help. 
 
What happens if money is drawn out too early or for a different reason?
 
If not used to buy a house, the funds cannot be withdrawn until the age of 60 (or if a saver becomes terminally ill) without incurring a hefty penalty. 
 
If withdrawn early, the Government bonus is lost plus a 5% charge is levied on the amount withdrawn. If the account holder has used their savings to invest in stocks and shares, any investment gains or interest made would also be deducted. This charge will still need to be paid even if the account has made a loss. 
 
The Government has made the rules harsh to ensure that the Lifetime ISA is only used for its intended purpose. If looking for a flexible way of saving, this account is not an option, but offers good incentives for those with a longer-term view.