Ever wondered how they work and who can benefit from them?
Lifetime ISA’s let you save up to £4,000 a year towards your first home or retirement. It gives you a cash bonus up to £1,000 a year on top of this. The following guide walks you through how the accounts work and whether they are a good choice for you.
What is a Lifetime ISA?
Not only does a Lifetime ISA allow you to save up to £4,000 every tax year towards a first home or your retirement, the state adds a 25% bonus on top of what you save. This means you get a £1,000 of free cash annually.
Plus, you will earn interest on whatever you save. As it is ISA that interest is tax-free.
What you need to know!
25% bonus every tax year
Save up to £4,000 a year in a Lifetime ISA by putting in cash when you can or as a lump sum.
You then get 25% bonus on top of that. So, if you save £1,000 you will have £1,250 saved. If you save the full £4,000 then you will have £5,000. This is all before interest and growth.
- The bonus stops being paid when you reach 50.
- If you contribute monthly the bonus is pad monthly – this takes 4-9 weeks to arrive.
- Once in your bank account the bonus counts as money – so you will get interest on it too.
- You will only get the bonus on contributions – not on interest or stocks.
- The maximum bonus is £33,000 if you open it at 18 and max it out until you hit 50 (unless you’re born on 6 April, when the max is £32,000).
Lifetime ISA’s age restrictions
Anyone aged 18-39 can open a Lifetime ISA.
If you are swiftly heading for 40 years old, then make sure you open one before you hit the cut-off age. Once you have hit 40, you can continue to put money into the Lifetime ISA until the day before your 50th birthday.
You can still transfer to a new provider to get better interest rates. You just can’t open another one for new money only.
Open and contribute to a cash ISA and a Lifetime ISA at the sametime
The overall ISA limit is £20,000 in the 2020/21 tax year. You are allowed to split this between a LISA (up to the maximum £4,000) and put the remainder in a cash ISA, stocks and shares ISA and/or an innovative finance ISA (for peer-to-peer investing) in the same tax year.
You’re also allowed to hold a Help to Buy ISA and a LISA at the same time, though you can’t get the first-time buyers’ bonus on both. But you could get the Help to Buy ISA bonus for a home and then use the LISA and its bonuses for retirement.
What you need to know – for First-time buyers
First-time buyer definition explained
A first-time buyer is someone who’s NEVER owned a property anywhere in the world before. If you have owned a property inside or outside the UK – you cannot use the Lifetime ISA towards the purchase of a home. This includes owning a property (or a share of one) that you inherited, even if it was sold straightaway and you didn’t live there.
You must be buying a residential UK property to live in that costs £450,000 or less
You won’t be eligible for buy to lets. To get the bonus you need to buy a property that costs £450,000 or less with any residential mortgage. That includes Right to Buy, shared ownership, self-builds, and Help to Buy loans. The LISA is intended to help you buy your first home, so you’re not supposed to rent it out.
If you put the money in a LISA and don’t qualify to use it for a property (e.g. the property you want is more than £450,000), you’ll have to pay the penalty to withdraw it or you can keep it for use once you hit 60. So, think seriously about whether this could happen to you first.
There is no such thing as a joint Lifetime ISA
If you are buying a home together then it is important to know there are no such thing as a joint Lifetime ISA. You will need to open separate ones.
If you’re a first-time buyer making a purchase with someone who’s owned before – you can still open one and use it towards a home purchase together.
If you’re both first-time buyers buying a property together costing £450,000 or less – you can both open one and save in it, essentially doubling the bonus. Note: even if you’re both using the LISA, the £450,000 limit is strict. It doesn’t double because you’re both using the LISA cash.
Your Lifetime ISA must be open for a year or more before you can use it for a home
Please be aware – you need to have had the Lifetime ISA open for at least 12 months to be able to use it (and the bonus) towards your first home. So, you are looking to buy your first home within a year then this isn’t the best option for you.
As you must have had a LISA open for a year to be able to use it for a first home, anyone with even an inkling of being a first-time buyer should open a LISA with the bare minimum (can be just £1) just to get the clock ticking – in case you want to add to it later.
What you need to know – for retirement savers
Remember things change
Even if you decide tomorrow you want to get a Lifetime ISA before your 40th birthday, your 60th is 2 decades away and the rules could change during this time. Here is how it stands right now:
- You can access the cash on or after your 60th birthday and it use it for whatever you like.
- Remember you don’t have to cash out all at once. You can make particle withdrawals.
- If you decide to leave it in there you will still continue to get interest or investment growth /loss. It remains active.
- You don’t pay tax on cash. All the money that is taken out of your Lifetime ISA for retirement is tax-free.
- LISA savings will affect your eligibility for benefits. Unlike a pension, which isn’t counted as savings for means-tested benefits, the LISA will affect your eligibility for them. So, you could have to pay to withdraw your LISA retirement savings and live off those until your savings are down below the means-testing threshold. Similarly, they count as assets in bankruptcy or divorce cases.