The Motley Fool
My Wallet Hero

What is a Lifetime ISA?

Ever wondered what a Lifetime ISA is and whether you could benefit from one? If you’re planning to save for your first home or for retirement, and would like your savings topped up by a government bonus, then read on. I’ll tell you what you need to know about a Lifetime ISA, including the pros and cons, who is eligible, and how to go about opening one.

What is a Lifetime ISA?

A Lifetime ISA is a means for 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. Therefore, 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.

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. 

What are the 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. 

In addition, no capital gains tax, income tax or dividend tax is charged on amounts invested through the product. Over the course of an individual’s life, this could lead to significant tax savings that produce a higher account balance in the long run.

What is a Lifetime ISA used for?

Money invested in a Lifetime ISA can be used to fund part of the purchase of a first home. The property must cost no more than £450,000, and it must be used to live in rather than be rented out. 

A Lifetime ISA may also be used to fund retirement. Withdrawals for retirement purposes can be made from age 60. 

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

What are the limitations of a Lifetime ISA?

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.

It is not possible to open a Lifetime ISA if you are over the age of 40. 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 do you open a Lifetime ISA?

It is relatively simple to open a Lifetime ISA online; the process is similar to opening other types of ISA, such as a Cash ISA.

A wide range of providers are available. It may be worth 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. Therefore, it is a good idea to have this information to hand before applying for a Lifetime ISA.

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

Verdict

A Lifetime ISA is a straightforward means of saving for a first home or retirement in a tax-efficient manner. It offers a government bonus that can add up to a significant sum of money over the long run. For those individuals who are eligible to open a Lifetime ISA, it could be worth doing soon in order to maximise the benefits that are available.

Ready to learn more about savings? Click here to get started right now

MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. The Motley Fool has recommended shares in Lloyds, Tesco and Barclays.