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Lifetime ISAs launch – what you need to know

A brand new type of ISA is now available to help you save for your first home or retirement. Here’s how the Lifetime ISA, or LISA, is going to work.

What is the LISA?

Simply it’s a new kind of Individual Savings Account (ISA). With ISAs, any interest you earn is tax-free, so they can be a good place to put your money. The big difference with the LISA is you’ll also get a huge 25% bonus on the money you put in – if you use it to buy your first home or your retirement.

How much can you save in a LISA?

Every tax year (April to March) you can save £4,000. You’ll get the first 25% bonus paid on the money saved in April 2018, and after that it’ll be paid monthly. So if you invest the max each year you could make an extra £1,000 a year. You’ll also get any additional interest the account offers.

Who can get a LISA and how?

First you need to be under 40 years old to open a LISA. You also need to be over 18 years old and a UK resident (though “Crown servants” can also get one). Once you’ve got one you can keep paying into it until you are 50 years old.

However, there aren’t many banks who have made a LISA available for customers on launch. Those that are on the market are all Stocks and Shares LISAs, meaning the value of the money you put in could go down. The first Cash LISAs are expected in the summer.

How to use a LISA to buy your first home

It’s pretty similar to the Help to Buy ISA, but the main difference is you can use your savings on properties worth up to £450,000 anywhere in the UK, not just London.

If you are buying with someone else and it’s also their first property, then you can both get a LISA and use the bigger bonus, though still with a property cap of £450,000.

Help to Buy ISAs do have advantages in the short term at least. You can use them when you buy within just a few months, while you can’t use a Lifetime ISA until you’ve had it for 12 months.

You also need to live in the home you buy with a LISA bonus, which rules out buy-to-let or holiday homes.

If you’ve already got a Help to Buy ISA you’ll be able to transfer the savings over to a LISA.

How to use a LISA to save for retirement

If you don’t use the savings to buy a home (or even if you do), you can keep saving until you are 50 years old. You can then start using the money and 25% bonus when you are 60, or earlier if you are diagnosed with a terminal illness.

If you need the cash before then, there is a 25% penalty for taking it out, meaning you’ll lose the bonus.

What about other ISAs?

There are now four types of ISA. Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs and the new LISAs. You can pay into one of each of these in the financial year up to an overall limit of £20,000.

The Help to Buy ISA counts as a Cash ISA, so if you have one of those you can’t also pay into another Cash ISA. You can however have a Lifetime ISA.

Our money expert Andy Webb explains ISA basics in this video

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