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This guide tells you the advantages and disadvantages of a Lifetime ISA and how this compares to Help to Buy ISAs.
This guide outlines the pros and cons of investing in an ISA or pension.
Those aged between 18 and 39 can open a Lifetime ISA and continue to save into their account until the age of 50. You need to be a UK resident (or Crown Servant).
A Lifetime ISA is a savings account that can be used to either help fund the purchase of your first home or to supplement your pension , once you are aged 60 or over. This may appeal particularly to those who are self-employed and do not have a personal pension.
You can put up to £4,000 a year into a Lifetime ISA and this counts towards the 2019/20 tax-year annual ISA limit of £20,000.
There is a bonus of 25% of whatever you save into a Lifetime ISA from the Government (which is paid monthly), resulting in a maximum of £1,000 extra per year if you pay in the full £4,000.
You would earn £32,000 from the Government bonus, if you saved the maximum amount possible from the age of 18 to 50 and earned the maximum £1,000 per year. The total of your deposits (including the bonus) over the 32 years would be £160,000 before you earn any interest.
The 25% bonus is paid only on your actual deposits and not including any interest. So, if you save £1,000, the Government will pay £250 into your account.
Your savings, including your bonus, will earn interest and this will be compounded either monthly, annually or on the anniversary of your account opening. The benefit of this is that after year one you start to earn interest on interest.
Yes, Lifetime ISAs are available as both cash ISAs and stocks and shares ISAs.
A Lifetime ISA should be a medium to long-term investment choice. They are designed to be used either to help fund the purchase of a first home or to supplement your retirement savings or pension once you are over the age of 60, or if you have a terminal illness with less than 12 months to live. If you need to withdraw funds for any other purpose, then these will likely incur a penalty.
If you want to use your Lifetime ISA to help buy a first home, then the property value must not exceed £450,000.
Other than age and being a UK resident, there are no other restrictions to open a Lifetime ISA, although it would be best to make sure you won't need the funds you put in for any reason other than saving for retirement or buying a first home. This ensures that you don't end up having to retrieve your money and paying a penalty, which we'll cover below.
It is possible for your spouse or civil partner to inherit your Lifetime ISA account – this would be as an additional permitted subscription allowance.
No, all withdrawals from a Lifetime ISA are free from tax.
You can only put money into one lifetime ISA per tax year up to a total of £4,000 plus the Government bonus of £1,000. You can transfer your Lifetime ISA to an alternative provider – this will help to make sure you get the best return on your savings. Look at our list of providers for Lifetime ISAs to see which accept transfers in.
As long as each individual is eligible for the Lifetime ISA to buy their first home, then it is possible to have use their Lifetime ISAs to buy a house.
While you simply have to be 60 to gain access to your LISA for retirement purposes, withdrawing the funds for a house purchase is a little more complicated. First of all, you really have to be a first-time buyer, so you can't already own a home (even as buy-to-let) or commercial property anywhere in the world. Second, the home you buy must be in the UK and worth at most £450,000, purchased with a mortgage and for you to actually live in (though you may be able to rent out the property at a later date).
You and your partner can both be first-time buyers with your own LISAs, and both funds will count, but the property still can't be worth more than £450,000. Furthermore, you will have to have held the Lifetime ISA for at least 12 months to get the bonus.
There'll be no tax to pay, as the money will go straight to a conveyancer or solicitor. The funds will be used at exchange, with the purchase needing to complete within 90 days of the savings being withdrawn (if the purchase falls through, the LISA savings will be returned to your account). Talk to your solicitor or conveyancer beforehand to make sure your LISA funds are eligible and how to arrange for them to be used (don't withdraw the cash yourself as you'd be penalised, as explained below).
When it comes to retirement saving, you can withdraw the money in the account at any time after the age of 60, to use however you like, although the LISA is designed specifically to support people in retirement. You don't have to take it all out at once - you can make partial withdrawals to supplement your income, for example. Any money you leave in could still grow/gain interest and remains tax exempt.
Although the Government bonuses stop once you reach 50, and you're also no longer able to add additional funds after that time, you'd still gain interest (or potential investment gains) on your savings during the 10 years you'd have to wait to gain access to your pot. You'd also still be able to move your funds between Lifetime ISA providers to benefit from better rates.
The market for Lifetime ISAs will increase in importance as Help to Buy ISAs close to new accounts from the 30 November 2019. Currently, there are providers offering both cash and stocks and shares versions of Lifetime ISAs.
A Lifetime ISA comes with the advantage of a 25% cash bonus from the Government. Interest rates may be higher on other savings accounts but a Lifetime ISA allows you to grow your savings pot over time, with the benefit of a maximum of £1,000 per year contribution from the Government, depending on the amount of your contributions.
You can put up to £4,000 a year into a Lifetime ISA, and get a 25% bonus from the Government (which is paid monthly), resulting in a maximum of £1,000 a year extra. As you can open such an account at the age of 18 (until you're 39) and the Government will add a 25% bonus until the age of 50, this means that you have the potential to earn a maximum bonus of £32,000.
Note that you only receive the bonus on the savings you put in, not on any investment growth or interest that is accumulated, but that you will be able to make gains on the bonus amount. The compounding effect means this could soon add up, which is why it benefits everyone that since 6 April 2018 the bonus is paid on a monthly basis.
You can open a Lifetime ISA if you're a UK resident (or Crown Servant) aged between 18 and 39 years old. There are no other restrictions to open one, although it would be best to make sure you won't need the funds you put in for any reason other than saving for retirement or buying a first home. This ensures that you don't end up having to retrieve your money and paying a penalty, which we'll cover below.
If you're looking to buy your first home in the next few years, or simply want an additional way to save for retirement, and don't mind locking away up to £4,000 per year for your future, then a Lifetime ISA might just be for you. While pensions are still the best way to save for later life, an extra £1,000 a year is certainly nothing to be sneezed at.
Additionally, you won't have to pay any tax on the money that is in an ISA, and you'd earn interest or make potential investment gains on the bonus as well as your own savings over the years, which could all add up. Of course, once you reach 60 and take money out of the ISA, you will become liable for taxation depending on what you do with the money.
One potential negative when it comes to Lifetime ISAs is that most providers currently only offer a stocks and shares LISA, with only a few cash Lifetime ISAs currently available. This means that many savers would have to invest your annual £4,000 in the stock market and risk the possibility of negative returns, albeit for the potential of much higher gains.
The good thing about the LISA's access restrictions, in combination with the stock market, is that investments tend to do best over the long term. This means that, unless you are planning to take the money out of the Lifetime ISA in a year's time, the long-term benefits could outweigh the risks. This is down to personal preference, however, and your attitude towards risk.
You can transfer your Lifetime ISA funds between providers without a penalty. This means you can continue to look for the best rates to maximise your Lifetime ISA returns.
There are four types of ISA: the cash ISA, stocks and shares ISA, innovative finance ISA and Lifetime ISA. You can only open one new ISA of each type per tax year. There's nothing stopping you from opening all four types of account, for instance by putting the maximum amount in a Lifetime ISA and the rest of your annual ISA allowance in a cash ISA (or a stocks and shares ISA, an innovative finance ISA, or split between the different types).
For the 2019/20 tax year, the ISA limit is £20,000, which means that if you put the maximum in a Lifetime ISA, you would still have £16,000 to distribute between the other types.
You can have as many as you'd like, but you will only be able to open and pay into one per tax year. This effectively means that you'll only get the Government bonus paid on one of your LISAs, but it also means you wouldn't be able to benefit so much from the effects of compound interest on your accumulated savings. Particularly for the purposes of buying a house, it would be much simpler to have your savings combined in a single Lifetime ISA; your solicitor/conveyancer might not even accept multiple accounts.
The Government's generous 25% bonus is calculated and added to your LISA on a monthly basis (from 6 April 2019). This does not, however, mean that you will be able to access it. As stated, the Government bonus gets paid directly through the solicitor when buying a house, and subtracted (plus a penalty) if you decide to take your money out before the age of 60 unless you are terminally ill. You will only see the bonus yourself once you're 60 and your Lifetime ISA cash becomes fully available.
A Lifetime ISA is an alternative to a Help to Buy ISA for those wanting to save for their first home. They have different annual maximum deposits.
Maximum deposit per tax year
25% of your ISA balance up to £1,000 per year. Continues until you reach the age of 50.
Up to £4,000 per year.
Help to Buy ISA
25% of your total balance up to a maximum of £3,000.
Up to £1,200 for your first deposit and then up to £200 per month.
Our Help to Buy ISA versus Lifetime ISA guide explains more.
Help to Buy ISAs are no longer be available to new investors.
Lifetime ISAs remain open to new investors as long as they meet the criteria for the product. Help to Buy ISAs, which were another Government scheme aimed at savers, closed to new savers on 30 November 2019. If you open a Help to Buy ISA before this date, you can still pay into it until 30 November 2029, while the bonus must be claimed by 1 December 2030.
You can also choose to invest in a stocks and shares LISA instead.