Lifetime ISAs can help you to save for your first home or your pension. Plus they come with a Government bonus.
A Lifetime ISA, simply put, is a type of tax-free savings account (ISA stands for individual savings account) that allows you to save for retirement or your first home, or both (as long as you leave the minimum required investment amount in a LISA, you can keep it open after buying a home). While it comes with a lot of restrictions, it has the benefit of a generous Government top-up.
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.
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.
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).
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.
Anyone who withdraws cash from their LISA without being at least 60 or terminally ill with less than 12 months to live (remember that for a house purchase, you don't withdraw the funds yourself - your solicitor arranges the transfer for you) attracts a penalty. Specifically, the Government subtracts 25% from the money you take out.
This may seem like the Government simply taking back their bonus, but it actually goes beyond that. Not only would you lose the entire 25% bonus, you would also effectively lose 6.25% of your own investment. That's because 25% of £1,000 (which would be your own investment in this example) is a smaller amount than 25% of £1,250 (your investment plus the Government bonus). So, only invest in a Lifetime ISA if you're confident you won't need to take the money back at any point other than for a first home or retirement.
Yes. While you may not want to take the money out of the LISA given the penalty involved, you can transfer your funds between LISA providers without restriction. This means you wouldn't be stuck with your original Lifetime ISA provider forever, and you'd be able to take advantage of the best Lifetime ISA rates. Remember, however, that you will need to follow the proper transfer procedure to ensure your savings remain penalty and tax-free.
NEVER close your existing LISA or withdraw the money yourself. You must follow the specific ISA transfer process.
There are four types of ISA: the cash ISA, stocks & 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, however, for instance by putting the maximum amount in a LISA and the rest of your annual ISA allowance in a cash ISA (or a stocks & 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.
If you're not sure you want to lock your money away, but you'd still like to save up for a first home with the help of a Government bonus, there's the Help to Buy ISA to consider. These accounts also come with a 25% bonus, but allow penalty-free withdrawals. The reason for this is because the bonus doesn't get added to the account until your solicitor files the paperwork while you're completing your first house purchase, so withdrawing funds would not give you access to the bonus anyway.
Note that the Help to Buy ISA scheme closes to new savers on 30 November 2019, and that you'd only be able to use the bonus from either a Lifetime ISA or Help to Buy product for a house purchase, not both. You can, however, open a Help to Buy ISA from as young as 16 (but you won't be able to open both a cash and Help to Buy ISA in the same tax year).
Others, who may be reluctant to stash their cash in a Lifetime ISA and aren't interested in saving for a first home, could choose a stocks & shares ISA instead. If you're already 40 or over such an account could provide decent returns over the next 15-20 years to help you save towards your retirement. For the risk-adverse, there are of course plenty of cash ISAs or even non-ISA fixed rate bonds to consider. Remember, however, that there is no substitute for a workplace pension when it comes to tax-free retirement saving, so don't neglect it.
Find out more about auto-enrolment and workplace pensions
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