What is a Lifetime ISA and how best to use it?

If you want to buy your first home or save for retirement, the Lifetime ISA (also known as LISA) could be a good launching pad as it was specifically designed for these purposes. This type of Individual Savings Account (ISA) was created to help people between the ages of 18 and 40 save money. The government will also chip in: it will give a bonus every year equal to 25% of what you pay into a Lifetime ISA, up to a set limit.

A crucial difference compared to other ISAs is that you can only invest £4,000 in a tax year, while with other ISAs the limit is £20,000 in the 2021/2022 tax year. To make your first payment you have to be older than 18 but younger than 40. To open a Lifetime ISA you have to be a resident of the UK, or a Crown servant (for example in diplomatic service, or overseas civil service), their spouse or civil partner. 

Under your Lifetime ISA scheme you can invest in either a cash ISA, a stocks and shares ISA, or have a combination of both. Stocks and shares ISAs might be a better choice if you start saving early and can take your time riding out the ups and downs of the markets and are comfortable with taking some risk. Keep in mind that your Lifetime ISA will count as part of your annual ISA investment limit, so if you open a Lifetime ISA, you can invest no more than £16,000 in other types of ISAs in the same tax year. 

A big benefit of LISAs is that the government will add a 25% bonus on top of your savings, up to a limit of £1,000 a year, until you turn 50. This means that if you save the full £4,000 annually in your LISA, the bonus will push that up to a total £5,000 for the year – plus you can earn interest and pay no taxes. The government bonuses are paid on a monthly basis. After you turn 50 you will no longer be able to pay into your Lifetime ISA, or earn the 25% bonus, but your account will stay open and the savings will still generate returns on your investments.

The Lifetime ISA can be a good option for you if you don’t get the benefit of an employer pension contribution through a company scheme, for instance if you are self-employed, or if you want to supplement your retirement savings.

Lifetime ISA

Can I withdraw money?

You can withdraw money from your Lifetime ISA account if you are buying your first home, turn 60 years old, or become terminally ill with less than a year to live. It is important to remember that you can also dip into your sayings for any other reason at any time, but in this case will pay a 25% withdrawal charge. This essentially means that if you withdraw your money early, you lose the government bonus that you had received up to that time after your investments, plus pay an additional penalty fee.

Let’s see a concrete example! If your initial savings amount is £1,000, you will earn a government bonus of 25%, bringing total savings to £1,250 that year. If you wish to withdraw the entire amount, the 25% will be charged to that full amount, leaving you with only £937.5 in your hands, so less than you put in. If you only want to access some of your funds, you will have to take into account the 25% charge when making your withdrawal. 

Lifetime ISA

How can I use the savings to buy my first home?

You can use your Lifetime ISA to buy your first home if some conditions are met:

  • the property costs £450,000 or less
  • you are a first-time homebuyer, meaning you cannot own or have owned a home in the UK or elsewhere
  • you must be buying a home you plan to live in
  • you buy your home after the first year you made your payment to the Lifetime ISA
  • you are buying with a mortgage
  • you are buying with the help of a solicitor or conveyancer – the ISA provider will pay the funds directly to them. 

If you are buying together with someone else, and that person also has a Lifetime ISA and meets the criteria, you can combine the two savings, including the government bonuses. Your partner will, however, have to pay the 25% withdrawal charge to use their Lifetime ISA savings if they own a property or have a legal interest in one, such as being a beneficiary of a trust that includes property. 

Lifetime ISA

How can I use my savings later in life?

You can take out your Lifetime ISA cost-free when you turn 60. If you withdraw earlier than that, you will pay the 25% withdrawal charge. 

In case you die, any LISA saving is passed onto your beneficiaries, people in your will, without penalties. However, it will form part of the estate and can be subject to Inheritance Tax.

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