What is a Lifetime ISA?
16th Apr 2024 Managing your Money
4 min read
A lifetime individual savings account (LISA) could boost your deposit if you plan to buy your first home. This article explores what a Lifetime ISA is, how it works, eligibility and the pros and cons.
What is a Lifetime ISA?
A Lifetime ISA is a tax-free savings account
you can use to help buy your first home or save for retirement.
You can choose either a cash or stocks and
shares LISA, or both, and save up to £4,000 annually and get a 25% bonus (up to
£1,000 every year) until you’re 50.
This allowance is part of your overall annual
ISA allowance, which is currently £20,000.
Lifetime ISA: how does it work?
If you want to use a LISA to buy your first
home, don’t delay opening an account, as you can’t use it for a deposit until
at least 12 months after your first payment into the account.
You can earn interest on your balance, which is
tax-free, as your funds are held in an ISA. You can keep contributing after you
buy your home and use the money for retirement.
If you choose a stocks and shares LISA, you won’t
pay tax on dividends, capital gains or interest.
However, you need to accept some risk as the
value of your investments can rise and fall.
Buying a home with someone else? You can both open
and use a LISA, including the government bonus, but you must be first-time
buyers and meet the eligibility conditions.
Lifetime ISA: who can open one?
Unlike other ISAs, you can only open a LISA
if:
- You’re between the ages of 18 and 39. You must make your first payment before turning 40.
- You are a UK resident or a Crown servant.
Many banks, building societies and investment platforms
offer Lifetime ISAs and various interest rates, so it’s worth shopping around.
It’s easy to apply for and open an account,
which you can usually do online. You’ll need to make sure the property you want
to buy costs £450,000 or less and that you’re getting a mortgage.
You’ll need a conveyancer or solicitor, as your
LISA provider will pay the money to them, and the property purchase must be
completed within 90 days of your savings being sent to them.
Lifetime ISA: when is the bonus paid?
Your bonus payments are calculated on a monthly
basis. They are based on contributions made on the 6th of the month to the 5th
of the following month.
So, your January bonus will be based on
contributions made between 6 January and 5 February.
If you choose a stocks and shares LISA, check
if your bonus will be reinvested.
Lifetime ISA: can you withdraw money?
You can withdraw funds from a Lifetime ISA if
it’s for your first home, you are 60 or over, or you have less than a year to
live.
So, if you take money out for any other reason,
you’ll pay a 25% withdrawal charge, as this is considered unauthorised.
This charge means not only does the government
get its bonus back, but you’ll lose some of your savings.
For example, if you pay £1,000 into a LISA and
the government tops this up by 25% (£250), you’ll have £1,250. But if you
withdraw this and it’s unauthorised, a 25% charge applies, leaving you with
£937.50, which is less than you put in.
Are there any restrictions with the Lifetime ISA?
The Lifetime ISA is only available for those
aged between 18 and 39, and you can contribute until the day before your 50th
birthday, but you’ll still get interest and/or investment returns on your
balance.
You can hold more than one Lifetime ISA if it’s
opened in a different tax year or transfer it to another provider. However, you
can only pay into one account each year.
While you can transfer funds from an ISA into a
LISA, the £4,000 annual limit still applies.
If you have a Help to Buy ISA (now closed to
new customers) and a Lifetime ISA, you can only use the government bonus from
one of them for your first home.
Lifetime ISA: is my money safe?
If your provider is covered by the Financial
Services Compensation Scheme (FSCS), up to £85,000 in a cash LISA is
protected.
If you have more than £85,000 with a provider, you
should consider saving the excess with another bank or building society to ensure
your funds are protected.
If you’re considering a stocks and shares LISA,
your funds are protected if your ISA provider goes under, but not if your
underlying investment goes bust.
What are the pros and cons of a Lifetime ISA?
There are many advantages to opening a Lifetime
ISA, including:
- Up to a £1,000 bonus yearly from the government to go towards your house deposit (if you’re aged between 18 and 50).
- Getting capital gains, dividends, and interest tax-free.
- Having the ability for you and your partner to use a Lifetime ISA and bonuses for your first home.
- Being able to transfer your LISA or money from other ISAs to your account.
However, there are many disadvantages,
including:
- You must be aged between 18 and 39 to open an account and can only contribute until the day before your 50th birthday.
- If you make an unauthorised withdrawal, you’ll be hit with a 25% withdrawal charge and lose some of your savings.
- The criteria to buy a home worth up to £450,000 at least 12 months after opening a LISA, and you need to use a mortgage and have a solicitor or conveyancer.
Financial advice can help you decide how to buy your first home.
Unbiased can quickly connect you to a financial adviser or mortgage
broker who can guide you through the home-buying process.
Banner image source:
Photo by Towfiqu barbhuiya on Unsplash
