The forthcoming lifetime individual savings account (Lisa) will pay savers a government bonus on a monthly basis from April 2018, helping them to grow their pot more quickly. The Lisa, which will launch in April 2017, is designed to help under-40s get on to the property ladder or save towards retirement by awarding them a 25 per cent government bonus on savings of up to £4,000 a year.
The government also says that the bonus will be paid on the amount contributed by savers, rather than the value of the funds. This will safeguard the level of the bonus from decreases in the value of the savings due to market falls.
Unlike Help to Buy Isa savers, Lisa savers will also be able to withdraw money from their pot at the point of exchanging contracts, rather than on completion.
Danny Cox, chartered financial planner at Hargreaves Lansdown, says: "Making the Lisa values plus bonus available at exchange of contracts will help first-time buyers' cash flow, and it is a better system than the Help to Buy Isa as the cash will be ready when needed."
But for the 2017-18 tax year the Lisa bonus will be paid annually, which means savers will initially have to wait until the next year to receive their government top-up. Mr Cox adds that the government has indicated the bonus may be paid as late as summer 2018, so savers hoping to buy next year need to factor in a bonus delay.
More launches likely
The release of these further details on the Lisa might mean more providers will be ready to offer it by April next year. There have been concerns that many providers will not be ready to launch by April 2017.
"Timescales are tight and this clarification from [the Treasury] on the technical aspects will allow providers to quickly move ahead with their development work in readiness to offer the Lisa next April," explains Jeffrey Mushens, technical policy director at financial services industry body, Tax Incentivised Savings Association (TISA).
Since the further details were released, Nutmeg and Fidelity have both confirmed they will be launching a Lifetime Isa.
But one area the government has yet to finalise is whether savers will be allowed to borrow funds for free from their Lisa, so long as the borrowed funds are fully repaid.
And concerns remain on the penalties savers will face if they withdraw money for any purpose other than retirement, house purchase or terminal illness.
"If you invest £4,000, you get a 25 per cent top-up from the government to make £5,000," explains Lisa Caplan, head of financial advice at Nutmeg. "But if you withdraw early you will be penalised by 25 per cent which is £1,250, so you will be left with £3,750, 6.5 per cent less than your initial investment. Savers need to watch out for this.
"We're disappointed to see that people who need to withdraw their money early will effectively be charged 6.25 per cent. It's fair enough for the government to reclaim the bonus, but savers need to realise they will lose more than that."
Mr Mushens said TISA would continue to argue for the abolition of the additional exit charge and call for a widening of the lifetime events that would qualify for a penalty-free withdrawal.
However, Mr Cox says: "The under-40s we've spoken to think [the fee is acceptable] because they know what it is from the outset, and also think it's reasonable for the bonus to be taken away if you're not using it for the purpose it's intended. People need to make sure they choose the right products to meet their objectives."
