Lifetime ISAs

Saving for your first home, or want to pad out your income during retirement? A Lifetime ISA could grow your money and reward you with free cash. Find out more in our guide.
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Introduction to Lifetime ISAs

Getting free cash by simply saving your money sounds too good to be true, but that’s exactly what the Lifetime ISA offers its customers. Established in 2016, this government scheme has been designed to encourage us Brits to save for our future, but how exactly does it work, and how much money could you really earn?

We discuss this and much more in our in-depth guide.

Click a topic below for more information, or read on for a comprehensive understanding of Lifetime ISAs.

What is a Lifetime ISA?

A Lifetime ISA (LISA) is a type of individual savings account that’s designed to help people aged 18-39 buy their first home, save for retirement, or both. It’s a longer-term, tax-free savings account which gives you a 25% bonus from the government on whatever you save, up to £4,000 per tax year.

How do they work?

They have the same benefits as other ISAs in that you won’t pay tax on any interest or investment returns. You can put £4,000 per year into the account until you’re 50. The government will give you £1 for every £4 you save, so you could receive a maximum of £1,000 free cash per year.

You can pay into your account monthly or invest in a lump sum each year, depending on what works for you. Some providers will set a minimum opening amount, from £1, £10 or even £100 (though others won’t require a penny to set up an account), and some will pay your interest monthly or yearly. Also, some LISA providers only let you manage your account via certain communications, including telephone, branch, online, mobile, mail, or a combination of all.

If you wish to cancel your LISA account, you have a 30-day window to do so before incurring any charges.

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How much can I save?

The amount you can save in total will be different for everyone, as it will depend on the following:

  • The age you were when you opened your account
  • The amount you pay into your account each year
  • How long you plan to pay into your account for
  • The rate of interest on your funds
  • What you intend to do with your funds (such as buy a home or use it for retirement)

It will also depend on whether you want your Lifetime ISA to hold cash, stocks and shares, or a combination of both. See below to find out the differences between both.

Cash Lifetime ISA

A Cash LISA works in a similar way to a savings account in that you earn interest on your savings, you won’t have to pay any account fees or management charges, so they are ideal if you’re wanting to keep costs low. While your money is safe, the returns you get might be more modest compared with stocks and shares Lifetime ISAs.

Stocks and shares Lifetime ISA

With a stocks and shares LISA, you could potentially grow your funds at a greater rate compared with a cash LISA. Providers will assess your attitude towards risk vs reward and offer you the choice between a cautious, balanced or adventurous diversified investment portfolio.

You may have to pay admin fees, management charges, fund expenses charges and any other associated fees.

Interested in finding out more about a stocks and shares Lifetime ISA? Make an enquiry and we’ll match you with one of the FCA-approved experts we work with for a free, no-obligation chat about your options.

They have whole-of-market access, meaning that they can find you the best products to suit your needs and circumstances.

How do I claim my bonus?

Your 25% government bonus is paid monthly. Before April 2018 it was paid yearly, though monthly bonuses can benefit from compound interest. This is a process of growing your funds by earning interest on money that you previously earned through interest.

This ‘snowball’ effect allows you to grow your funds more quickly, though an expert can advise you on how to maximise your profits.

Saving for your first home

In order to buy your first home with the aid of a Lifetime ISA, you must have opened your LISA at least 12 months before you intend to apply for your government bonus, though it’s recommended that you save for around five years to maximise your savings and bonus amount.

To qualify for it, you must:

  • Be a UK resident
  • Purchase a property up to the value of £450,000 (including London)
  • Be a first-time buyerwho has never owned a property, including any inherited properties
  • Be a place where you intend to live
  • Be purchased with a mortgage, not with a full cash payment

The funds and bonus from your Lifetime ISA can be put towards an exchange deposit – so long as the property purchase is completed within 90 days of your solicitor receiving the funds.

If you’re buying a property with another first-time buyer, you can combine your Lifetime ISA with their Lifetime ISA or Help to Buy: ISA (which closed to new applicants in 2019). However, if they currently or previously owned their own property they will not be able to use either scheme, though you can still use your Lifetime ISA to purchase a home with them.

You can use a Lifetime ISA to buy land if you’re wanting a self-build property, so long as your plans meet the criteria of your chosen scheme.

Unfortunately, you cannot get a buy-to-let property with a Lifetime ISA.

If this is what you’re after, get in touch and we’ll match you with an expert mortgage broker who can advise you on how to save for a buy-to-let mortgage and even find the best deals available.

Saving for retirement

Once you turn 60 you are free to withdraw your Lifetime ISA funds to do with as you wish; this also includes the 25% government bonus.

Any withdrawals you make are tax-free as the money you contributed with would have already been taxed. If you want to grow your money after you turn 60, you could transfer it to another ISA.

Can I use it instead of a personal pension plan?

It’s not recommended. While a Lifetime ISA can boost your total retirement income, it should not be used as an alternative to a pension scheme but instead as a complementary savings option. While you could make a healthy profit with a LISA, others could lose out – and it comes down to what tax band you fall into.

For example, a basic-rate taxpayer would benefit the most from a Lifetime ISA, as they receive 20% tax relief on their pension but could earn a 25% bonus from the government, therefore earning 5% more than their pension scheme offers. On the other hand, a higher-rate taxpayer receives 40% tax relief on their pension payments, which easily beats the 25% bonus.

If you are a higher-rate or an additional-rate taxpayer, you may wish to consider a savings vehicle which will provide you with potentially greater returns, such as a stocks and shares ISA.

Make an enquiry and we’ll match you with one of the experts we work with who can walk you through your options.

What are the rules?

The rules are similar to any other type of ISA. Any contributions will come from your own money, and you’ll be able to transfer to a different provider within 30 days of opening your account.

Contributions made into a Lifetime ISA also count towards the £20,000 ISA allowance per year, so bear this in mind if you have another ISA.

You can open multiple LISAs during your lifetime, though you will only be able to pay into one per tax year.

See below for more information about how LISA rules regarding age, withdrawals and tax may affect you.

Age limits

You must be between 18 and 39 to open a Lifetime ISA. You can continue to save up to £4,000 a year and receive your government bonus until you reach 50, though your funds will be locked until you reach 60. After 60, you can withdraw some or all of your money, including the 25% bonus, to spend as you wish.

While you cannot open a new LISA if you’re over 40, there are plenty of other options available to help you save for your retirement, such as a personal pension plan.

Withdrawal and tax charges

You can withdraw your funds after you turn 60, to purchase your first home with, or if you are terminally ill. If you withdraw this money for any other reason, you’ll face a government charge of 25% on any sum you withdraw.

Not only will you lose the 25% bonus, but you’ll also lose £6.25 per £100 you withdraw.

How is a Lifetime ISA different from a Help to Buy: ISA?

You can use both to claim a 25% tax-free bonus, though the main difference is that you could save up to £4,000 p.a. in a Lifetime ISA compared with £2,400 in a Help to Buy: ISA. However, Help to Buy: ISAs closed to new applicants in November 2019, and LISAs were introduced to eventually replace the scheme.

If you have a Help to Buy: ISA, you can continue saving into the scheme until 30th November 2029, though you must claim your bonus before 1st December 2030.

Unfortunately, there was a misunderstanding about how the bonus could be used with a Help to Buy: ISA, as the 25% bonus cannot be used for the exchange deposit, whereas you can with a Lifetime ISA.

Interested in switching from a Help to Buy to a Lifetime ISA? One of the experts we work with would be more than happy to help you. Make an enquiry to get started.

Can I have both?

Yes, you can, and you can opt for a different provider as well. However, bear in mind that the 25% government bonus will only be applied to one. If you took out a Help to Buy: ISA before the scheme closed to new applicants, you can open a Lifetime ISA and save into both during the same tax year.

If you’re a first-time buyer and the person you’re buying the property with has a Help to Buy: ISA, you can use your Lifetime ISA and both claim the 25% free bonus.

Can I transfer funds between these ISAs?

If you have an existing Help to Buy: ISA, you can transfer any funds within that account into your Lifetime ISA, so long as it doesn’t exceed the £4,000 annual limit.

If you have over £4,000 in your Help to Buy: ISA account, you could wait until the following tax year to make the switch or continue paying into it.

Can I transfer funds from any other type of ISA into a LISA?

Yes, you can transfer funds into your Lifetime ISA from a different type of ISA, such as a cash ISAs and stocks and shares ISAs. However, the £4,000 annual limit of your LISA will still apply and you can only contribute a maximum of £20,000 per year across your ISA accounts.

Bear in mind that if you transfer funds from a Lifetime ISA into another type of ISA, you would incur a 25% government withdrawal charge.

For information about transferring between ISAs and managing your money, speak with an advisor. They’ll be able to assess your situation after an initial free chat and recommend your best course of action, though there is no obligation involved.

What are the best Lifetime ISAs available in 2020?

The right Lifetime ISA for you (or even whether it’s the right financial product for you or not) will depend on your personal circumstances.

There are plenty of banks, building societies and other providers who offer LISAs, though some of the most common providers include:

  • AJ Bell
  • Hargreaves Lansdown
  • Moneybox
  • Newcastle Building Society
  • Nutmeg

Whether these providers will offer the right Lifetime ISA for you is a different question. In order to make sure that you get it right the first time with a product tailored to your needs, speak with an expert.

Speak to an expert

With so many products on the market designed to help you save and grow your funds, it can be difficult deciding which option would be best for you. Luckily, the experts we work with are on-hand to advise your next steps and recommend the best products to boost your earnings.

Make an enquiry and we’ll match you with a financial expert for a free, no-obligation chat. We only work with advisors authorised by the Financial Conduct Authority (FCA), and each advisor has whole-of-market access in order to find the best products that may otherwise be unavailable to the general public.

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