Lifetime ISA guide

How does the Lifetime ISA work?

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The Lifetime ISA was introduced in April 2017 to help first-time buyers get a foot on the property ladder and/or help people save for retirement.

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What is a Lifetime ISA?

A Lifetime ISA (LISA) is a tax-efficient savings scheme designed to help people save enough money to buy their first home and/or save for a comfortable retirement.

Under the terms of the scheme, the government will pay in £1 for every £4 you save.

The maximum you can invest is £4,000 a year, meaning the 25% government top-up is worth up to £1,000 a year.

The bonus will be added each year, so you can earn interest on it thereafter.

The bonus is only paid on contributions made by the accountholder until he or she reaches the age of 50.

You can have a cash Lifetime ISA (where you will also earn interest) or a stocks and shares Lifetime ISA.

What can I use a Lifetime ISA for?

Buying your first home

You can use the money you’ve saved in a LISA to buy your first home at any time.

However, you can only use Lifetime ISA cash to fund a deposit if the property you are buying costs less than £450,000 and the property is in the UK.

You will also need to be living in the property yourself and not renting it out.

If you are buying a home with another first-time buyer who has a Lifetime ISA you can use both sets of funds.

If you use the money to pay for a deposit on your first home, you can continue saving into the scheme after the purchase.

To find out more about buying your first home, head to our first-time buyer guide and take a look at our mortgage calculator.

Retirement

If you don’t use the money from your Lifetime ISA to buy your first home, it has to remain in the account until you reach the age of 60 – but keep in mind the bonus stops being paid from your 50th birthday.

Once you’ve reached 60, you can use the money to help fund your retirement or for whatever you need.

Who can open a Lifetime ISA?

To be eligible for a Lifetime ISA, you will need to be 18 or over and under 40 on the date you open an account.

You can open an account alongside a standard ISA or a pension fund. You will also be able to open a Lifetime ISA if you already own a property – though you can’t use the money you save to buy a second property.

How much can I invest in a Lifetime ISA?

You can invest up to a maximum of £4,000 a year in a Lifetime ISA.

This amount will make up part of your overall ISA allowance, which is £20,000 for the 2019/20 tax year.

The amount the government pays into your Lifetime ISA will be on top of this.

The more you save up to the £4,000 annual limit, the higher the bonus you will receive – up to a maximum of £1,000 a year.

How much will the government contribute to my fund?

Under the terms of the scheme, the government will pay in £1 for every £4 saved.

In other words, it will top your savings up with an extra 25% - pushing the total amount invested in your account to a maximum of £5,000 a year.

When will the bonus be paid?

The government bonus will be paid into your account at the end of each tax year.

Providing nothing changed in the rules governing the scheme, an 18-year old could run a Lifetime ISA for 32 years, saving a maximum of £128,000 and earning a government bonus of £32,000, giving a total of £160,000.

Interest would also be earned (tax-free) on the savings as they accrued. The amount of interest will vary from provider to provider.

Are there any drawbacks with a Lifetime ISA?

There’s a 25% charge to withdraw cash from a Lifetime ISA except in the situations described below. This in effect repays the government bonus earned to that point.

The charge doesn’t apply if you’re:

  • buying your first home
  • aged 60 or over
  • terminally ill, with less than 12 months to live

When you turn 50, you can no longer pay into your Lifetime ISA or earn the 25% bonus. Your account will stay open if you take no action, and your savings will still earn interest or investment returns. 

Are there any other restrictions?

When it comes to buying property, you can only use a Lifetime ISA to save for a deposit on a first home.

So, if you’re already on the property ladder, you can only use the scheme to save for retirement.

How do LISAs compare to Help to Buy ISAs?

Help to Buy ISAs were available between 1 December 2015 and 30 November 2019. They were aimed at first-time buyers saving for a deposit for a house.

The scheme is now closed to new customers but if you already have a Help to Buy ISA you can continue paying into it until 30 November 2029.

  • You can pay in up to £1,200 in the first month and up to £200 a month thereafter
  • For every £4 you put in, the government will add £1 when you decide to buy a home
  • The maximum amount you can have in a Help to Buy ISA is £12,000.

In comparison, with a Lifetime ISA you get the government top-up at the end of each tax year. You can also invest in stocks and shares as well as cash (Help to Buy ISAs are just cash).

What’s more, unlike a Help to Buy ISA, you don’t have to save into a Lifetime ISA each month, or put in the same amount each time. You can invest a lump sum each year if that works for you.

What if I already have a Help to Buy ISA?

You can keep your existing Help to Buy ISA and open a Lifetime ISA alongside, although you will only be able to claim the bonus from one account to buy a property.

Alternatively, you can transfer the amount in your Help to Buy ISA into a Lifetime ISA.

Can I have more than one Lifetime ISA?

You can have more than one Lifetime ISA but you can only open and pay into one each tax year. The maximum amount you can pay into ISAs overall in the current tax year is £20,000.

Can I transfer my Lifetime ISA?

You can transfer the funds from your Lifetime ISA to another Lifetime ISA – this can be a good idea if you find one paying a better rate of interest.

However, if you transfer your Lifetime ISA to a different type of ISA you will have to pay the 25% government withdrawal charge.

Can I have a Lifetime ISA and a pension?

The Treasury has stressed that the Lifetime ISA is not a pension and can run alongside other long-term savings accounts.

In other words, you can pay into a pension and get tax relief on your contributions while benefiting from the Lifetime ISA bonus at the same time.

Whether or not a Lifetime ISA is better for you will depend on your personal circumstances.

Employees who receive employer contributions into their pension schemes will also be better off paying into those.

Who offers Lifetime ISAs?

Lifetime ISAs come in both cash and stocks and shares forms.

This means they are offered by traditional ISA providers such as banks, building societies and fund management companies. These include:

  • Skipton Building Society
  • Nottingham Building Society
  • Newcastle Building Society
  • Nutmeg
  • AJ Bell
  • MoneyBox
  • Hargreaves Landsdown
  • The Share Centre
  • OneFamily
  • Foresters Friendly Society

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