Lifetime ISA: key questions answered ahead of its 5th birthday

It’s almost five years since the Lifetime ISA was introduced. To commemorate the ISA’s fifth birthday, here are the answers to a few key questions about it.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Paper fortune teller investment opportunities

Image source: Getty Images

A Lifetime ISA, commonly known as a LISA, is a type of individual savings account introduced by the government in 2017 to help people save either for their first home or for retirement. Since their inception, Lifetime ISAs have become immensely popular, especially among younger savers. According to data released by HMRC and cited by Hargreaves Lansdown, 154,000 savers set up a Lifetime ISA in 2017/2018. In 2019/2020, this figure increased to 545,000.

Are you thinking about opening a Lifetime ISA? Ahead of its fifth birthday, here are answers to some of the most frequently asked questions about this type of ISA.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

[top_pitch]

What exactly is a Lifetime ISA?

A Lifetime ISA is basically a type of savings account.

If you open a Lifetime ISA and put money into it, the government will give you a bonus worth 25% of the amount, up to a limit of £1,000 every tax year. Currently, you can contribute up to £4,000 to your Lifetime ISA every tax year.

Keep in mind that contributions to your Lifetime ISA form part of your annual ISA limit, which for the 2021/2022 tax year is £20,000.

As explained by Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, if you contribute to other types of ISA, such as a cash ISA or a stocks and shares ISA, make sure to keep track of how much you put into each, as exceeding the £20,000 limit will result in a tax charge.

Who can open and contribute to a Lifetime ISA?

You can open a Lifetime ISA if you are aged between 18 and 39 and are saving for your first home or retirement. You can continue to contribute to the ISA until you reach the age of 50.

When can you withdraw or use your money?

You can withdraw funds tax free to buy your first home any time after the first year of holding the ISA. Alternatively, if you use the Lifetime ISA to save for retirement, you can withdraw your money without any charge once you reach the age of 60.

While you will be unable to contribute to your Lifetime ISA or receive the government’s 25% bonus after the age of 50, your account will remain open and your savings or investments will continue to grow.

[middle_pitch]

Do you pay tax on any growth in your savings or investments?

In a word, no.

Any growth in your savings is not subject to tax. And if you put your money into a stocks and shares Lifetime ISA, you will not have to pay dividend tax or capital gains tax on your investment income.

Can you use the cash for something else?

If you take the money out for any reason other than to pay for a first home or for retirement, you will incur a 25% penalty.

As a result, it’s best to use your Lifetime ISA funds solely for one of these two purposes.

How does it differ from a Help to Buy ISA?

Both the Lifetime ISA and a Help to Buy ISA attract a 25% government bonus. But that’s where the similarities end. Here are the key differences between the two ISAs as highlighted by Helen Morrissey:

  • The maximum annual contribution for a Lifetime ISA is £4,000. For a Help to Buy ISA (after the first year) it is £2,400, and you must pay it monthly.
  • A Help to Buy ISA is only for cash savings. With a Lifetime ISA, you can choose between a cash Lifetime ISA or a stocks and shares Lifetime ISA.
  • Lifetime ISAs are limited to homes selling for up to £450,000 across the UK. For Help to Buy, however, the £450,000 limit only applies to London. For homes bought elsewhere, it’s £250,000.

Who can benefit from opening a Lifetime ISA?

A Lifetime ISA can provide a useful boost to people trying to save for their first home.

It can also benefit anyone trying to save for retirement. According to Morrissey, self-employed people, in particular, who are not covered by auto-enrolment into a workplace pension and who thus do not receive any top-up to their savings from an employer, may find Lifetime ISAs quite beneficial when it comes to their retirement planning.

For the employed and those who might already be contributing to a workplace pension, it can be a good alternative vehicle to supplement your retirement pot.

If you are currently eligible for a Lifetime ISA, even if you do not see how it would work for your circumstances, Morrissey recommends that you consider opening one regardless and contribute a minimum amount just to keep your options open in the future.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »