Lifetime ISAs – how they work

Lifetime ISAs (also known as LISAs) are a new type of ISA created to help people 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.
  • At the end of the 2017/18 tax year, you are paid a 25% bonus from the government. After April 2018, 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 2017/18). 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.

Example

If one year 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 2017/18 tax year.

If one year 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 2017/18 tax year.

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.

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 less 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 traditional repayment 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 website.

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 ISA’s 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 less than £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.

To compare the two schemes check Help to Buy ISA or Lifetime ISA?

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.

Find out more about Workplace Pensions in Automatic enrolment – an introduction.

When can you access your money?

You can access money in your Lifetime ISA, including the government bonus and without paying any less 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

During the 2017/18 tax year, you can take money out of your Lifetime ISA without having to pay a fee, but only if you take all your money out and shut the account.

You can open another Lifetime ISA later in the year.

As of April 2018, you will be able to take money out of a Lifetime ISA, but you will have to pay 25% of the amount withdrawn.

For example, if you take out £1,000, you will have to pay £250, which means you’ll lose any government bonus.

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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