Lifetime ISAs (also known as LISAs) are a type of ISA created to help people aged between 18 to 40 years save for their first home or retirement. If you take out a Lifetime ISA, the government will give you a bonus worth 25% of what you pay in, up to a set limit, every tax year. This guide will help you understand whether taking out a Lifetime ISA is the best option for you.
How a Lifetime ISA works
If you’re buying a home with someone else, you can both take advantage of separate Lifetime ISAs.
- You can put a maximum of £4,000 into a Lifetime ISA each tax year, until you’re 50.
- You are paid a 25% bonus from the government. The bonus will be paid in monthly.
- The maximum bonus you can earn in a tax year is £1,000.
- The amount you pay in is linked to your annual ISA allowance (£20,000 for 2021/22). For example, if you pay £1,000 into your Lifetime ISA, you can still pay £19,000 into other ISA products.
- You can open a Lifetime ISA, a cash ISA, a stocks and shares ISA and an innovative finance ISA in each tax year.
If you put £1,000 into your Lifetime ISA, the government will add an extra £250. This would leave you with £1,250 at the end of the tax year.
If you deposit £200 into your Lifetime ISA, the government will add an extra £50. This would leave you with £250 at the end of the tax year.
How is my bonus paid?
HMRC now calculates bonus payments on a month-by-month basis. Any bonus is calculated based on payments you make into your account from the sixth of the month to the fifth of the following month.
However, it’s a good idea to check with your provider as some may treat bonus payments differently. Some will automatically re-invest bonus payments taking advantage of any potential growth and increase in value. Some may put your money into non-interest earning cash accounts meaning you could miss out on interest or future potential growth of your invested fund.
Who can get a Lifetime ISA?
You can open a Lifetime ISA with any bank, building society or investment manager that offers the product.
To open a Lifetime ISA you need to be:
- between the age of 18 and 40
- a UK resident or a Crown servant (for example, a member of the armed forces serving abroad).
You can continue paying into a Lifetime ISA until you are 50. After age 50 you will not be able to pay in to your Lifetime ISA or earn the 25% bonus. Your account will still stay open earning interest or investment returns.
Using a Lifetime ISA to buy your first home
If you want to use a Lifetime ISA to buy a home, there are a few restrictions you need to keep in mind:
- only first-time buyers can use Lifetime ISAs to buy a home. That means you can’t own, or have owned, a home in the UK or anywhere in the world
- you will need to be buying a home for no more than £450,000
- you must be buying a home you plan to live in. The scheme is not for buying a home you want to rent out, or a holiday home
- you must use a residential mortgage.
You can combine your Lifetime ISA with other schemes such as Help to Buy. Find out more on the Government’s Own Your Home
Buying a property together
If you want to buy a home with your partner and you both meet the eligibility criteria, you can combine your Lifetime ISAs to buy a property together.
If only one of you is eligible, for example, if the other already owns a home, then only the eligible person can use a Lifetime ISA.
Help to Buy ISAs
If you have a Help to Buy ISA, or are thinking of getting one, remember you can only use them to buy homes worth up to £250,000 outside of London (the limit is £450,000 in London).
Lifetime ISAs can be used to buy homes worth up to £450,000, both in and outside of London.
Help to Buy ISAs are not available to new savers after 30 November 2019, but if you opened your Help to Buy ISA before then you can keep saving into your account. You must claim your bonus by 1 December 2030.
Using a Lifetime ISA for retirement
Don’t think having a Lifetime ISA means you shouldn’t pay into your pension. If your employer matches pension contributions it is well worth paying into your Workplace Pension Scheme.
You can make full or partial withdrawals from your Lifetime ISA, without paying a fee, when you turn 60.
You won’t pay any tax and can use the money for whatever you want.
When can you access your money?
You can access money in your Lifetime ISA, including the government bonus and without paying any tax if:
- you reach the age of 60
- you are diagnosed with a terminal illness
- you’re buying your first home and your account has been open for 12 months.
If you close your account during the cooling off period, you won’t get the 25% bonus.
Taking money out of your Lifetime ISA
You’ll pay a withdrawal charge if you take money out for any reason other than the three mentioned above.
The charge is usually 25% of the amount withdrawn.
This is worked out after your bonus is paid – remember though, you’ll only get the bonus if you take money out 12 months after your first payment into the account.
So if you get a bonus, and had £1,000, you’d have a total of £1,250 to take out. The 25% penalty charge is £312.50, so you’d only get £937.50 in your pocket, meaning you’d lose some of your savings and get back less than you invested.
That’s why a Lifetime ISA is only really suitable if you want to use it to help buy your first home, or to save long-term for retirement.
What happens if you die
If you die, any LISA money, including interest and bonuses, is passed on to your beneficiaries without penalty, for example, people in your will. But it will lose the ISA tax wrapper and will form part of the estate for Inheritance Tax purposes.
Means test and capital test risk
Money kept in a Lifetime ISA is treated like money held in other types of ISAs.
The 25% bonus is usually taken into account when working out any surrender value.
That means it could affect whether or not you’re entitled to certain benefits.
For example, any means-tested benefits could be affected as funds within a Lifetime ISA are treated as savings.
In addition, money within a Lifetime ISA would be seen as an asset for debt recovery purposes.
What happens if something goes wrong?
More information on ISAs
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