Lifetime ISAs

Applying for a mortgage
Applying for a mortgage

What is a Lifetime ISA?

A Lifetime ISA (LISA) is an account that’s specifically designed to help you save for your first home or to have extra funds available for your retirement. You need to open it when you’re between 18 and 40 years old. As it’s an ISA (Individual Savings Account), you can save without being taxed on the interest earned. You also receive a bonus from the government depending on how much you’ve saved and this is tax-free too.

Your savings and the government bonus

You can save up to £4,000 each tax year in your Lifetime ISA. The government gives you a 25% bonus on top of this. So, if you save £4,000 in one year, the government adds £1,000 to this. The maximum bonus you can receive from the government is £32,000. The government bonus only applies to your savings, not the interest or investment growth.

Once the bonus has been paid into your account, it can earn interest just like your savings. You can transfer lump sums into your account rather than having to save set monthly amounts. You can also transfer funds from another ISA into your Lifetime ISA and this money becomes eligible for the bonus.

A stocks and shares LISA

Saving with a cash LISA means you know exactly what amount of interest is to be paid on your savings and government bonus. With a stocks and shares LISA, however, the investment growth varies depending on its performance. You need to remember that you can incur losses if there’s a dip in the stock market. On the other hand, you can also grow your savings faster than a cash LISA if there’s a surge in investment growth.

If your stocks and shares LISA is performing badly, you just need to be patient and hope the market turns in your favour. If your account has been performing well and you’re worried that the market might turn, consider transferring your funds to a cash LISA to ensure you don’t lose the profit you’ve already earned.

Criteria for a Lifetime ISA

You need to open your account before you turn 40 and can save in it until you reach 50. The savings and bonus must either be withdrawn for use towards your deposit for your first home or after you’ve turned 60 for use in your retirement. The account must be open for at least a year before you become eligible for the government bonus.

As a first-time buyer, to be eligible for the bonus, the property you purchase must:

  • Have a value of up to £450,000
  • Be located in the UK
  • Be used as your own home
  • Be the only home you own
  • Be bought with a mortgage

You can benefit from higher savings and bonuses by purchasing your property with another first-time buyer and combining both of your Lifetime ISAs. If you are purchasing with someone who has already owned a property, you can still use your bonus towards it but he/she won’t be eligible to. You cannot open a joint Lifetime ISA with someone else as each account has to be opened by an individual.

Withdrawing your funds

As this account is designed with long-term savings in mind, you will be penalized if you withdraw your funds for any reason other than purchasing your first property, having reached the age of 60 or having been diagnosed with a terminal illness.

Any other withdrawals incur a hefty penalty of 25% of the amount you withdraw, which includes the government bonus. For example, you’ve saved £200 and the government has added the 25% bonus of £50, totalling £250. A 25% penalty on this total amount is £62.50, meaning you can only actually withdraw £187.50, which is less than the amount you originally paid in. The reason for this hefty charge is to recoup the bonus and any interest earned on it while also making a small charge on the savings you paid in.

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