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.

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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.

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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.

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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.

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