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What is a Lifetime ISA?

By:  Peter Stephens | 16th November 2021

Reviewed By: Katie Royals on 18th October 2021

A Lifetime ISA (LISA) can help you get on the property ladder or save for your retirement. But what is a LISA, and how does it work? Let’s break it down.

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Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.

What is a Lifetime ISA?

A Lifetime ISA is a type of ISA that allows individuals to save for their first home or retirement in a tax-efficient manner. 

You can invest up to £4,000 per year in a Lifetime ISA. The government then adds 25% to all amounts invested. If you invest the maximum £4,000 in a Lifetime ISA per year, you will receive a £1,000 bonus.

Any money that you invest in a Lifetime ISA counts towards your £20,000 annual allowance across all types of ISA.

The ISA allowance follows the tax year, so runs from the 5th April each year. This means the Lifetime ISA deadline for making contributions each year is 4th April.

Essentially, you can save up to £4,000 per tax year in a LISA until you turn 50. The government then gives you an annual 25% ‘boost’ on top of what you’ve saved that year – up to a maximum of £1,000. 

For example, you save £2,000 in a LISA in a tax year. You get a 25% bonus of £500, so you’ll have £2,500.

If you save the full £4,000, you get an extra £1,000 from the government, so you’ll have £5,000.

Once you turn 50, you won’t get the bonus any more and you can’t pay any more money into your LISA. However, your account stays open and your savings continue to earn interest or investment returns depending on if your account holds cash or stocks and shares.

How does a Lifetime ISA work?

This may sound great. But, as with any other type of ISA, a few rules apply.

These include:

Buying a first home

Now that Help to Buy ISAs are closed to new customers, Lifetime ISAs are the only ISA available that offers direct incentives to first-time buyers.

You can use the savings towards buying a first home if you meet the following criteria:

Saving for retirement

If you’re saving for retirement, you can withdraw all of your savings once you’re over 60. For those aiming for early retirement, a Lifetime ISA may not be the best option as you will face a penalty if you withdraw your money before your 60th birthday.

Who can open a Lifetime ISA?

Anyone over the age of 18 and under the age of 40 can open a Lifetime ISA.

Contributions can then be made up to the age of 50, with the government bonus continuing to this age.

When can I withdraw money from a Lifetime ISA?

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You can take money from your LISA if you are:

There’s no charge if you withdraw money in these circumstances. 

You can take your money out at any time. However, you will be charged if you withdraw money from your LISA for any other reason. The current charge is 25%. 

So if, for example, you’ve got £2,000 in your LISA and want to withdraw £100 on 7 April 2021 to pay a few bills. Rather than just taking out the £100, you’ll need to withdraw £125 to cover the 25% charge. This means you’re taking out more than you actually need and you essentially lose £25.

What are the main benefits of a Lifetime ISA?

The main benefit of a Lifetime ISA is the government bonus of 25% on all amounts invested. If you were to invest the maximum amount of £4,000 each year between the ages of 18 and 50, it would be possible to obtain a total of £33,000 in government bonuses. 

Additionally, there is currently no capital gains tax, income tax or dividend tax charged on amounts invested or saved  through the product. Over the course of your lifetime, this could lead to significant tax savings that produce a higher account balance in the long run.

There are no withdrawal penalties for using money within a Lifetime ISA for buying a home, or for withdrawing money after age 60.

What about the drawbacks of Lifetime ISAs?

Other than for the purchase of a first home, if you withdraw money invested in a Lifetime ISA before the age of 60, a 25% penalty is charged on all withdrawals. An exception to this is if the individual concerned has a terminal illness.

Essentially, Lifetime ISAs have a deadline. It is not possible to open a Lifetime ISA if you are over 40 years old. For individuals over the age of 40 who are looking for a tax-efficient means of saving for retirement, opening a Stocks and Shares ISA or a SIPP may be worth considering.

How to open a Lifetime ISA

If you qualify, it’s easy to open a LISA. If you’re a UK taxpayer aged 18 or over, simply shop around for a Lifetime ISA and apply with your chosen provider. 

Once you’ve opened your LISA, you can start saving right away. Remember: you can only open one Lifetime ISA per tax year, and you can only open two Lifetime ISAs in total.

It is relatively simple to open a Lifetime ISA online. The process is similar to opening other types of ISAs, such as a Cash ISA or a Stocks and Shares ISA.

A wide range of providers are available. It may be worth spending some time searching for the best deal, since different providers offer varying interest rates on cash held within a Lifetime ISA, as well as different fees when investing in shares and other assets.

Once you have found the best deal on a Lifetime ISA, you will need to head to the provider’s website. 

There will be an application process, which requires a variety of information such as your address history, financial situation and bank account details. It is a good idea to have this information to hand before applying for a Lifetime ISA – this will save you time during the application process.

After you’ve completed the application, you should receive confirmation that it is ready to use. You will then need to fund your account either through a debit card or bank transfer.

Are Lifetime ISAs worth it? 

A Lifetime ISA can help first-time buyers get on the property ladder and can also make it easier to save towards retirement. 

However, a LISA won’t be right for everyone. If you’re not saving for your first home or retirement, it may not be the right kind of savings vehicle for you. You’ll pay pretty steep charges if you try to withdraw money for other purposes.

There’s no need to rush into opening a LISA. Spend some time thinking about your own financial goals to ensure you find the right product for your needs: perhaps you’re interested in actively investing in the stock market to avoid ‘locking’ away your savings for such a long period of time, in which case it might be worth looking at a Stocks and Shares ISA instead. Speak to a regulated financial adviser if you need personalised advice.

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