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Lifetime ISA Guide

Category: ISAs
Author: Tim Leonard
Updated: 07/03/2019

ISAs have been a stalwart of the savings market for years, and now there's a new kid on the block - the Lifetime ISA. It came into being at the start of the 2017/18 tax year (6 April 2017), and adds another string to the tax-free savings bow. We find out more about it, and answer some key questions, below.

What is a Lifetime ISA?

Otherwise known as a LISA, the Lifetime ISA is the newest type of Individual Savings Account that allows people to save entirely tax-free. It's a little different to a traditional cash ISA, however:

  • It can be opened by someone between the ages of 18 and 39.

  • Instead of having the usual ISA allowance, which for the 2018/19 tax year is an impressive £20,000, you're only allowed to save £4,000 a year - but thanks to the bonus, if you save the full amount, it'll be topped up to £5,000 (see below).

  • The Government will give you a 25% top-up on everything you save until the age of 50. This means that, if you open an account at 18 and contribute the maximum until you're 50, you'll have £32,000 from the Government. Once in your account it counts as your own money, too, which means you can earn interest on the bonus.
  • At aged 50 you can no longer add funds to your LISA and cannot earn any further bonuses. However, your account will continue to earn interest.

  • It's designed to be an ISA for first-time buyers or retirement savers, and can only be used for one of these purposes - you'll be charged a penalty if you want to withdraw the funds for anything else.

  • Much like with regular ISAs, you can save in cash (a cash LISA) or invest your funds instead (a stocks & shares/investment LISA).

What can I use it for?

The money held in a LISA can only be used towards a first home worth under £450,000, or for retirement, in which case you can withdraw it once you're 60.

In the case of the former, you can use the money to buy your home at any time, provided you've held the LISA for 12 months or more, and that it's for a residential property in the UK. There'll be no tax to pay when you take the money out.

It's worth noting that the money will go straight to a conveyancer or solicitor, rather than you. All funds will then be used at exchange, with the purchase needing to complete within 90 days of the savings being withdrawn (but if the purchase falls through, the money will be returned to your account).

If you're saving for retirement, the rules are slightly different. You'll still get the Government bonus until the age of 50, but you can't access your money until your 60th birthday. You still won't have to pay any tax when you take it out, however, unlike with a pension, where money withdrawn is taxable after the initial tax-free limit.

You can use the money for whatever you like, although the account is designed to be used to help support you in retirement. You don't have to take it all out in one go – you can make partial withdrawals to supplement your income, for example – and if you leave the money in, you could still gain interest on it.

What if I want to use the money for something else?

The only way you can take the money out penalty-free is if you're using it to buy a first home, are saving for retirement, or if you have a terminal illness. However, if you need to access your money for any other reason, you still can - you'll just have to pay a 25% penalty.

This means that you'll lose the Government bonus, but will also effectively be hit with a 6.25% charge – essentially, you could have less than you put in. For example, let's say you saved the full £4,000 in the first year and earned the bonus of £1,000, giving you a pot of £5,000. If you then needed the money and had to close it during year two, the 25% charge would amount to £1,250 (more than the bonus) leaving you with £3,750, or £250 less than your original investment.

Essentially, this means that, if you want to use the money for anything else, or even think you might need to access it at some point, don't save into a LISA! For those happy with the requirements, however, it could still prove lucrative - who wouldn't want free money from the Government?

Am I eligible?

Yes, if:

  • You're aged between 18 and 39
  • You want the account to save for a first home or for retirement
  • You're confident you won't need the money for any other reason (not so much eligibility criteria, but best practice nonetheless)

No, if:

  • You're 40 or over
  • You want to buy a first home but are lucky enough to be a cash buyer. The LISA has been designed to help people get on the housing ladder, and so can only be used by those buying with a mortgage
  • You want to rent your property out. You can only use the LISA if you want to buy a residential property, and won't receive the bonus if your intention is to let (however, if your circumstances change after you buy, you may still be able to rent it out)

Ok, I'm eligible. How can I get one?

First, you'll have to do a bit of research to find a suitable Lifetime ISA. Most LISAs available are stocks & shares ones rather than cash LISAs, of which there is only one available.

Nevertheless, if you find an account to suit, the process of opening one should be fairly straightforward, in line with the opening process of traditional ISAs. Just contact your potential provider and they'll take it from there.

Note: a stocks & shares LISA may be more appropriate for saving for retirement as the investment is over a longer period of time. If you're planning to save for a first home within a few years, a cash LISA would probably be more suitable.

How much can I save?

You can save up to £4,000 in any tax year. There's no set rules on when you have to deposit those funds, however, unlike with the Help to Buy ISA, which only allows you to invest a certain amount each month. With a LISA, you can invest the full £4,000 as a lump sum at the start of the tax year, or can add to your account on a regular basis (depending on the requirements of the specific account chosen).

It's important to bear in mind that the £4,000 limit forms part of your overall ISA limit, which for the 2018/19 tax year is £20,000. This means that, if you max out your LISA, you can only save up to £16,000 in another form of ISA.

When can I access the money?

It depends on what you're using the money for. If it's for your first home, you can access the funds as soon as you're ready to buy - provided you've had the LISA for at least a year, which means that, if you're planning to buy in the near-future, you'll want to open an account as soon as you can in the 2018/19 tax year to make sure you're good to go as soon as possible. If you're using it for retirement, you can't access the money until your 60th birthday, unless you're diagnosed with a terminal illness.

I already have a Help to Buy ISA – can I get a LISA too?

Yes! There's nothing to stop you having one of each, but it's important to bear in mind that you can only use the Government bonus from one account to buy your first home. This means that, depending on the options available, it may be worth transferring your Help to Buy ISA to a LISA if you can find the right account, and if you don't have more than £4,000 saved - the higher investment limit of the LISA means the Government bonus could end up being worth far more, so transferring could be worth considering.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.