Lifetime ISA – how does it work and should you have one?

Font size

0
0
0
0

A Lifetime ISA or LISA is a tax-free savings or investing account that lets you save for your first home or you retirement. How do Lifetime ISAs work and should you have one?

Lifetime ISA – how does it work?

The Lifetime ISA or LISA is similar to an ordinary ISA, but there are some extra rules and regulations.

  • You can take out a Lifetime ISA if you’re aged between 18 and 40. You’ll be able to pay into a Lifetime ISA until you’re aged 50.
  • You can pay in up to £4,000 a year and get a government bonus. The maximum government bonus is £1,000. There’s no maximum monthly amount that you can pay in – although ISA providers may set their own limits.
  • A Lifetime ISA is tax free. As with ordinary ISAs, a Lifetime ISA will be tax free when you cash it in.
  • For every £4 that you pay in, the government will pay in £1. The maximum the government will pay in is £1,000 a year.

SAVVY TIP: If you take a Lifetime ISA out when you’re 18 and pay the maximum in every year until you’re 50, you’ll be paying in over 32 years. The maximum contribution of £4,000 a year over 32 years works out at £128,000. This is maximum you’d be able to pay in. The government will pay in up to £1,000 a year, so the maximum government contribution is £32,000. This works out at £160,000 in all.

  • There are restrictions on what you can use your Lifetime ISA money for. You can use the money you’ve saved in a Lifetime ISA to buy a property costing up to £450,000 if you’re a first time buyer or for anything you like after you’re aged 60.

SAVVY TIP: You can withdraw the money to buy a property anytime after the first 12 months. If you take out the money for anything else than to buy your first home you’ll face a 25% early withdrawal charge. This is 25% of everything that’s in the Lifetime ISA. This could mean you end up with less than you put in. See below for more detail.

Lifetime ISAs – the detail

Here’s the detail about how Lifetime ISAs work:

  • You can have one Lifetime ISA each year. You will be able to have more than one Lifetime ISA in your life but you’ll only be able to pay into one in any one tax year. This means you’ll be able to have one cash ISA, one stocks and shares ISA and one Lifetime ISA in each tax year, should you want to.

SAVVY TIP: If you’re buying a house with someone else who has a Lifetime ISA, you’ll both be able to use your Lifetime ISAs to pay towards a deposit. But if you’re buying a house with someone else who isn’t a first time buyer, they can’t use their Lifetime ISA towards their deposit without losing their government bonus.

  • Money you pay into a Lifetime ISA is included in your overall ISA limit. The ISA limit is £20,000 in the tax year 2019 – 20. The Lifetime ISA payment of up to £4,000 a year is not on top of your ISA allowance.
  • You can transfer Lifetime ISAs. will be able to transfer money from one Lifetime ISA to another, to get a better deal or return (as you can with ordinary cash and stocks and shares ISAs).
  • You can transfer money from an existing cash or stocks and shares ISA into a Lifetime ISA. As is the case with ordinary ISAs, money that you transfer from an ISA, that’s been paid in during previous tax years doesn’t affect your Lifetime ISA limit.
  • There are rules relating to what the Lifetime ISA can invest in. The rules for a Lifetime ISA will be similar to that of a stocks and shares ISA in terms of what the ISA can invest in etc.
  • The government is paid monthly. The ISA manager will claim the bonus on your behalf.

SAVVY TIP: If you want to buy a house halfway through a tax year, you’d be able to claim your bonus there and then and wouldn’t have to wait until the end of that tax year.

  • You can only use the Lifetime ISA to buy a property if you’re a first time buyer. You won’t be able to qualify for the government bonus if you’ve bought or owned a home in the past or if you’re buying a property to rent out. If you have a Help to Buy ISA, you can only use the bonus from one of them towards your house purchase.

Who offers Lifetime ISAs?

There are different types of Lifetime ISA – cash Lifetime ISAs and stocks and shares Lifetime ISAs.

Cash Lifetime ISAs:

Several companies offer stocks and shares Lifetime ISAs. They include:

 

Closing a Lifetime ISA

As mentioned, you’ll be able to cash in your Lifetime ISA when you buy your first home or when you’ve reached 60. Once you’ve reached 60 you don’t have to take all the money out in one go. You can take part of your Lifetime ISA money. You’ll also be able to cash in your Lifetime ISA when you’re terminally ill and are expected to have no more than 12 months to live.

If you cash in your Lifetime ISA for other reasons, you’ll lose the government bonus (and any interest or growth that you’d received on that bonus).

Related articles: 

Help to Buy ISAs – how do they work and who’s paying the highest interest rate?

Stocks and shares ISAs – understanding how they work

SavvyWoman email newsletters: If you found this information useful why not sign up now to receive free fortnightly email newsletters with money saving tips and help? You can sign up at the top of any page on the website and your details won’t be passed to any other company for marketing purposes.