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Six things you need to know about the Lifetime ISA

Six things you need to know about the Lifetime ISA

Category: ISAs
Author: Leanne Macardle
Date: 06/04/2017

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The Government has added another string to its tax-free savings bow – the Lifetime ISA, or LISA for short, officially launches today (6 April 2017). It was first announced by the former Chancellor, George Osborne, in last year's Budget, to help people meet their savings goals. But just what is the Lifetime ISA, and how can you benefit? Read on for an overview of the key things you need to know about this new savings vehicle.

1. It can be opened by anyone aged 18 to 39. There's a clear cut-off point – if you're 40 or over on 6 April 2017, you won't be able to open one, even if it's your 40th birthday.

2. You can save up to £4,000 each year, with this forming part of your annual ISA allowance (which for the 2017/18 tax year is £20,000). Depending on availability, it works much like a traditional ISA, in that you can save in cash or stocks & shares.

3. You'll receive a Government bonus of 25% on top of everything you save, which means your pot could be topped up by as much as £1,000 every year. The bonus will be paid until the age of 50, with the maximum amount you could receive potentially standing at £32,000 (if you saved the full £4,000 a year between the ages of 18 and 50). Once it's in, it's your money, which means you can earn interest on the bonus, too.

4. The savings can only be used to put towards a first home or retirement. The LISA has been designed with two aims in mind – to help first-time buyers get on the ladder, and/or help people save for retirement. In the case of the former, you can withdraw the money at any time after 12 months of having the account, provided the funds will be used to buy a first home in the UK worth up to £450,000. In the case of the latter, you can only access the money on or after your 60th birthday. Either way, the money can be taken out tax-free.

5. Withdrawing the money for any other reason will result in a 25% penalty charge. The only exception to this is if you are diagnosed with a terminal illness, or you take the money out within the first year, i.e. before the first bonus is paid. However, this 25% penalty means you could end up with less than you put in – not only will you lose the Government bonus, but you'll effectively have an additional 6.25% charge on top of it.

For example, let's say you saved the full £4,000 in the first year and received the Government bonus, bringing your pot to £5,000 (excluding any interest earned). If you took the money out in year two, the 25% charge would mean you'd be left with £3,750 – less than your original investment. It's for this reason it should only be considered by those who are confident they won't need their money for any other reason.

6. So far, it hasn't gained much traction – in part because of the aforementioned restrictions, together with concerns that it could mean people stop saving into a workplace pension – with only three Lifetime ISAs available at the time of writing, all of them stocks & shares versions. These are available from Hargreaves Lansdown, The Share Centre and Nutmeg. Skipton Building Society is the only provider so far to announce that it will offer a cash LISA, but this won't be available until June.

So, will you be taking advantage? The LISA may not be widely available just yet, but could still be worth considering – after all, tax-free money from the Government is nothing to be overlooked. We'll keep you posted on any developments.

What next?

You can find out more about the Lifetime ISA by reading our guide.

If the LISA isn't for you, you'll still want to make the most of your 2017/18 ISA allowance – check out the best cash ISA rates, or if you're comfortable with a bit of extra risk, find out more about stocks & shares ISAs instead.

Alternatively, a Help to Buy ISA may be more appropriate if you're saving for a first home and want the security of cash – check out the best deals.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.