From April 6th 2017 you can have a Lifetime ISA if you’re aged between 18 and 40. You’ll be able to pay in £4,000 a year. How will it work and should you have one?
Lifetime ISA – how does it work?
The Lifetime ISA 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. There’s no maximum monthly amount that you can pay in – although ISA providers may set their own limits.
- As with ordinary ISAs, a Lifetime ISA will be tax free when you cash it in.
SAVVY TIP: This means that the maximum you’d be able to pay in would be £128,000, with the government contributing a maximum of £32,000.
- For every £4 that you pay in, the government will pay in £1, up to a maximum of £1,000 a year.
- 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, but this won’t be imposed in the first year (2017 – 18). That’s because you won’t get the government bonus until the end of the tax year for 2017 – 18, so you could lose 25% of your Lifetime ISA before you’ve even received the bonus.
Lifetime ISAs – the detail
Here’s the detail about how Lifetime ISAs will work:
- 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.
SAVVY TIP: 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.
If you’re buying with someone else who has a Lifetime ISA, you’ll both be able to use yours 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 (which will be £20,000 from April 6th 2017). The Lifetime ISA payment of up to £4,000 a year is not on top of your ISA allowance.
- You 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 will be able to 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.
SAVVY TIP: For one year only, from April 2017 – 18, you’ll be able to transfer in money from your Help to Buy ISA. You can only transfer money you’ve saved into a Help to Buy ISA before Lifetime ISAs were introduced (i.e. money you saved before April 2017).
- 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 bonus will be paid at the end of the tax year. in 2017 – 18, but will be monthly from 2018 – 19. 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.
- As with the Help to Buy ISA, you’ll only be able to 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’re buying a property to rent out.
Who offers Lifetime ISAs?
Several companies offer stocks and shares Lifetime ISAs. They include:
As I write this, only one provider offers a cash Lifetime ISA and that’s the Skipton building society. Its online Lifetime ISA pays interest at 0.5%.
Closing a Lifetime ISA
As mentioned, you’ll be able to cash in your Lifetime ISA when you buy your first home (or you can withdraw some money and leave the rest where it is) or when you’ve reached 60. 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).
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