In our weekly series, readers can email in with any questions about retirement and pension savings to be answered by our expert, Rachel Vahey, head of public policy at investment platform AJ Bell. There is nothing she does not know about pensions. If you have a question for her, email us at money@theipaper.com.
Question: I have been using a lifetime ISA to save money to buy a house. But I have recently met someone and moved in with them. They own their own house, and I think it’s unlikely we will move elsewhere, particularly in the short term. Can you tell me if I have now lost money on my lifetime ISA? If so, what can I do with it instead – can I take it out now or later when I’m retired? Or if I decide to use it for retirement can I move it into my pension?
Answer: Congratulations on the new chapter in your life. It sounds as if you have been making plans and saving towards a particular goal but, as so often in life, events overtake us – and our savings and investments also have to change course.
A lifetime ISA is a very useful way of saving for a first home. Those individuals younger than 40 can set up a lifetime ISA and pay up to £4,000 a year into it, and the Government will add in a bonus of 25 per cent, making a possible total of £5,000 a year. These payments can continue until the individual’s 50th birthday.
But lifetime ISAs are not without their flaws. If an individual younger than 60 withdraws the money, but not to buy a first house, then a withdrawal charge of 25 per cent will apply to the funds. This effectively claws back any government bonus, plus growth, given when building up funds. But it goes further; it also takes away a portion – 6.25 per cent – of the individual’s own savings as well.
A lifetime ISA has two uses. After a year, it can be used to buy a first-time house, and it can be used for retirement savings.
If you and your partner decide to buy another house in the future, then you should be able to use your lifetime ISA to put towards the deposit (as long as the purchase price is no more than £450,000). The rule is you have to be a first-time buyer, but your partner doesn’t need to be.
In theory, there is no time limit on this. Even though you have to stop paying into the lifetime ISA once you reach your 50th birthday, you could use the funds to buy a house after that.
You could also possibly use your lifetime ISA towards a remortgage if your partner wants to add you to the existing mortgage (as you are using the funds to buy a property for the first time). However, how easy this is to do depends on the situation, so it’s best to speak to a solicitor about the declaration they must give.
Alternatively, you can use your lifetime ISA to fund your retirement. You may withdraw the full amount after 60 without penalty.
You can’t directly transfer a lifetime ISA into your pension. But you could take funds out now and then pay them into your pension as contributions. But you would be paying a penalty charge on the funds if you take them out before age 60, and you would have to make sure that these additional pension contributions fall within your limits to get tax relief.
But there is something else to be aware of. The Government has announced that the lifetime ISA is going to be replaced by a new ISA product aimed at first-time buyers. At the moment, we have very little information on how that new product will work.
Nor do we know what will happen to those who currently have lifetime ISAs. They may be able to continue indefinitely and be able to use their lifetime ISA to buy a house or for retirement savings. But alternatively, they may have to be use the funds or transfer them to a different product by a certain future date. Until the Government decides the rules, I’m afraid we are all in the dark, and savers, like you, may be best waiting for the final detail before making any big decisions with a lifetime ISA.
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