As Nottingham Building Society prepares to launch the market’s second cash Lifetime ISA, AJ Bell has identified seven quirks that have been tripping people up since Lifetime ISAs became available:
You need to put money in your Lifetime ISA before your 40th birthday, or you miss out
You need to deposit money in the same tax year you opened the Lifetime ISA
You can’t claim the bonus if your details don’t match HMRC
You have to open the account 12 months before you buy a property
You can’t pay into a cash Lifetime ISA and a stocks and shares Lifetime ISA in the same tax year
If you transfer money from an ISA it counts towards your £4,000 limit
You could wait up to eight weeks for your bonus money
Laura Suter, personal finance analyst at AJ Bell, says:
“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.
“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.”
1. You need to put money in your Lifetime ISA before your 40th birthday, or you miss out – Lifetime ISAs can be opened by anyone over the age of 18 before their 40th birthday. However, just opening an account is not enough. HMRC does not deem the account to be officially opened until money is put in – even if that’s only £1.
“This means that anyone rushing to open the account before their 40th birthday needs to leave enough time to open the account and make their first deposit, bearing in mind bank transfers can also take a number of days to complete,” says Laura Suter.
If money isn’t deposited in time, then HMRC states the account must be closed.
2. You need to deposit money in the same tax year you opened the Lifetime ISA – In a similar vein to quirk 1, you need to make sure you have deposited money into the account in the same tax year you opened it. Someone who opened an account in March 2018, had to make a payment before April 5 this year for it to be officially opened. If not, HMRC rules state that the account has to be closed by the provider and you will have to reapply.
“This rule is not the case with other ISA or SIPP accounts and so investors could understandably assume this was not the case. It seems unfair to create a product that doesn’t act as people would naturally expect it to do, because of the limitations of HMRC computer systems,” says Laura Suter.
3. You can’t claim the bonus if your details don’t match HMRC – The Government pays a 25% bonus on all contributions to a Lifetime ISA, up to £4,000 a year. When your Lifetime ISA provider claims your 25% Government bonus, it submits all the details it has on you and HMRC checks that this tallies with the information it holds on you before it will pay out the bonus. If there are any discrepancies in this information, HMRC will not pay up.
“The most likely instance is where someone has changed their name, particularly after marriage, and has not updated this with HMRC, or where they have made an error on their forms. It may seem like a small issue, but it’s affected around hundreds of cases AJ Bell has seen, where there has been a mismatch in details, meaning the bonus couldn’t be paid as quickly as it should,” says Laura Suter.
4. You have to open and fund the account 12 months before you buy a property – If you plan to buy a property in the next 12 months, the Lifetime ISA is not the product for you. The Lifetime ISA rules dictate that you must have the account open for 12 months before you can use it for a property purchase. And remember, that’s 12 months from the first payment in, not just opening the account.
“The 12-month rule is intended to stop people paying money in, immediately claiming the lucrative Government bonus and then withdrawing the money, but 12 months feels like a very long time. Six months, or even three months would be more reasonable,” says Laura Suter.
5. You can’t pay into a cash Lifetime ISA and a stocks and shares Lifetime ISA in the same tax year – Unlike conventional ISAs, where you can open and pay into one cash ISA and one stocks and shares ISA in each tax year, you can only open one Lifetime ISA each year. If you have opened two Lifetime ISAs, the second one to be opened will be closed and the money returned, regardless of how much is in there.
“You could have paid £10 into the first Lifetime ISA and £3,990 into the second, but the second one will still be closed,” says Laura Suter.
This is a particularly important to remember if you are transferring from one Lifetime ISA you’ve opened earlier in that tax year to another – this is possible, but the first payment into the new Lifetime ISA must be the full transfer from the original Lifetime ISA.
6. If you transfer money from an ISA it counts towards your £4,000 limit – You can contribute up to £4,000 into a Lifetime ISA each year. If you transfer money in from another ISA, it will count towards this limit. There was an exception to this rule for the first year of Lifetime ISAs, where you could transfer your entire Help to Buy ISA, regardless of the value, and it didn’t count towards your £4,000 annual limit. However, this has now ended. The only exception is where you are transferring from one Lifetime ISA to another Lifetime ISA (but see quirk 5).
7. You could wait up to eight weeks for your bonus money – For the first year the 25% Government bonus on the Lifetime ISA was paid after the end of the year, but now it is paid monthly. However, HMRC only allows your Lifetime ISA provider to apply for the bonus money once a month, and it can take up to 14 days to pay the bonus from this date.
For HMRC’s purposes, each month runs from 6th of the month to 5th of the following month. Your provider can then apply for the bonus from the 19th of that month, and get the bonus paid up to 14 days from this point (although in reality, so far, it has been paid sooner).
“Someone who paid the money in on the 6th June, for example, will not see the bonus for at least six weeks, and it could be as much as eight weeks. 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,” says Laura Suter.