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What is a Lifetime ISA?

What is a Lifetime ISA?
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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.

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

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What is a Lifetime ISA?

A LISA helps people aged between 18 and 39 save towards two huge life events: retirement, or buying your first house. 

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). 

Here are some examples. 

  • 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 anymore 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.

How does a LISA work?

As with any other type of ISA, a few rules apply:

  • You don’t pay tax on your savings.
  • It’s fine to hold stocks and shares in your LISA.
  • You’ll earn interest on UK government bonuses.

You can have more than one type of ISA, so if you’ve already got a cash ISA, for example, you can still open a LISA.

Buying a first home

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

  • Buy a property valued at £45,000 or less;
  • Buy with a mortgage; 
  • Wait at least 12 months after opening the LISA to make the purchase; and
  • Use a conveyancer or solicitor to buy the property. 

If you’re buying with someone else who also has a LISA, you can both use your savings. 

Saving for retirement

If you’re saving for retirement, you can withdraw all of your savings once you’re over 60. 

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When can I withdraw money from a Lifetime ISA?

You can take money from your LISA if you are:

  • Aged 60 or over
  • Buying a house 
  • Terminally ill (you’ve got 12 months or less to live)

There’s no charge if you withdraw money in these circumstances. However, you will be charged if you withdraw money from your LISA for any other reason (e.g. transferring money between ISAs). 

The current charge is 20%, but from 6 April 2021, it goes up to 25%. 

So, for example, say you’ve got £2,000 in your LISA. You 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, which means you’re taking out more than you actually need.

Can I get a Help to Buy ISA instead?

No. Help to Buy ISAs are closed to new applicants.

If you’ve already got a Help to Buy ISA, though, you can keep saving through it. 

How do I open a Lifetime ISA?

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 towards a property or your retirement right away. Just note that you can only open one Lifetime ISA per tax year, though. And you can only open two Lifetime ISAs in total.

Is a LISA right for me?

Well, it depends on your long-term financial goals. 

If you know you want to buy a house but you can’t afford a deposit within the next few years, a LISA can help you save money quickly. Or, if you know you can you afford to lock money away for your retirement, a LISA might be a good option for you. 

If you’re looking for easy access to your cash, or you don’t plan on buying a house, you might want to look at other ISAs or savings accounts instead. 

Takeaway

A LISA can help first-time buyers get on the property ladder and can also make it easier to save towards retirement. That said, a LISA won’t be right for everyone. 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. First, spend time really thinking about your own financial goals to ensure you find the right product for your needs.

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