Lifetime ISAs

The Lifetime ISA, or LISA as it is often shortened to, is a relatively new type of ISA that was introduced in 2017.

A LISA can be thought of as a replacement for Help To Buy ISAs. Although Help To Buys ISAs technically still exist the last date on which you could open a new one was 30 November 2019.

Like Help To Buy ISAs, Lifetime ISAs help you build up your savings and investments more quickly because the government adds a bonus element to any money you put in. And that bonus is a very attractive 25%. 

What’s the catch you may ask?

Well, you can only put in a total of £4,000 into a LISA each tax year, therefore limiting the bonus to £1,000 a year. 

The government bonus is paid on a monthly basis, typically a month or two after you have made the initial payment into your Lifetime ISA.

What’s more you should only use the money to buy your first home, once you turn 60, or you are terminally ill. 

Use your LISA for any other circumstances and a penalty of 25% is deducted which, because of the way percentages work, means you lose all of that bonus plus a little extra on top (more on this later).

The £4,000 annual limit for Lifetime ISAs forms part of your total £20,000 annual ISA allowance. So, if you have the money to do so, you can put the full £4,000 into a LISA and up to £16,000 in another type of ISA in the same tax year.

One other thing to note is that, because the concept of a Lifetime ISA is relatively new, the range of providers that offer them is fairly limited right now compared with most other financial products. There’s still a decent choice, we’d say, and the government bonus certainly makes LISAs worthy of considering. 

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

What are the age limits for LISAs?

Any UK resident aged 18 or over but under the age of 40 can open a Lifetime ISA.

However, you can continue to add new money to an already open Lifetime ISA up until your 50th birthday.

This means that if you are approaching your 40th birthday and don’t already have a Lifetime ISA then it may be worth opening one (you may only need to put £1 in to do so). You’ll then have 10 more years in which you can use your LISA and get the bonus.

What can you put in a LISA?

You can put either cash or stocks and shares into your lifetime ISA.

If you’re only planning to save for a few years before buying a home then the less volatile nature of a cash account may make more sense.

However, if you’re using your LISA to save for your retirement a few decades away, then stocks and shares should provide you with much greater growth prospects although their value will be more volatile along the way.

How you use a LISA to buy your first home

There are a few restrictions when using a Lifetime ISA to buy a home.

It has to be the first home you’ve owned (either in the UK or abroad) and it must be a UK home that costs £450,000 or less. 

You have to have made the first payment into your LISA at least 12 months before you buy it.

You also have to buy the home with a mortgage and use a conveyancer or solicitor (that’s because your LISA provider will pay the funds directly to them).

However, if you are buying as a couple, you can both use your own Lifetime ISAs to make the purchase, essentially doubling your firepower. It has to be your partner’s first home as well, if they are to keep their bonus.

How does the LISA penalty work if you use the money for something else?

This aspect can be a little confusing but a quick numerical example can help.

Say you save £2,000 in a Lifetime ISA. The government adds the 25% bonus so you then have £2,500.

If you were to withdraw that money, say to help pay for a new car, a 25% penalty would be applied. 

But the 25% penalty is applied to the figure of £2,500. That means £625 is deducted from your LISA and you only have £1,875, which is a little less than the £2,000 you originally put in.

What happens to Help To Buy ISAs?

If you already have a Help To Buy ISA you can continue to put new money into it up until 30 November 2029, which will be 10 years after the last date you could open one.

The government bonus rate is the same as it is for LISAs (25%) but the maximum bonus you can receive from a Help To Buy ISA is £3,000, which is a lot lower. 

And you can only save up to £200 a month into a Help To Buy ISA whereas the annual limit for Lifetime ISAs of £4,000 works out to be nearly twice as high.

Note that you can only use the bonus from one of these two schemes to help buy your first home.  

If you wish you can transfer the money from your Help To Buy ISA into your Lifetime ISA.

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