The Lifetime ISA explained
If you’re looking to buy your first home in the next few years, the Lifetime ISA (also known as a LISA) could be the best way to save. With a government bonus of up to £1,000 available each tax year, the LISA has been labelled as a no-brainer for first time buyers.
So how do you know if it’s right for you? We break down the main points to consider.
Introduced by the government in 2017, the Lifetime ISA is designed to encourage people to save for their first home (or retirement) and offers a government bonus of 25% on top of the tax-free savings. This means that for every £4 you pay in you get £1 for free. You can save up to £4,000 per tax year into your Lifetime ISA, giving you a potential bonus of £1,000 each year you save!
With Moneybox, you can choose to contribute to a Stocks & Shares Lifetime ISA and invest your money in the stock market, or save into a Cash Lifetime ISA and earn a great interest rate on top of your contributions and bonuses.
Lifetime ISA pros
- You can continue paying into a Lifetime ISA until you reach age 50.
- If you contributed the maximum amount of £4,000 every year (from age 18-49 inclusive) you could receive £32,000 in bonuses from the government.
- Save up to £4,000 each tax year, no monthly limits.
- You can use the Lifetime ISA to buy a property valued at up to £450,000 anywhere in the UK.
- Bonus is paid monthly, so you’ll earn interest on your bonuses as well as your own contributions.
- Can be used either to buy a first home, or save for retirement.
Lifetime ISA downsides (there’s only a few!)
- You can only open if you are aged 18-39.
- You can use your Lifetime ISA to purchase a first home only after it has been open for 12 months or longer.
- From 6 April 2021, if you withdraw money for any reason other than buying your first home (up to £450,000) or retirement, you’ll pay a government charge of 25% on the the amount you withdraw. This means you’ll get back less than you’ve put in.
House deposit calculator
Use our house deposit calculator to see how much you need to save each week with a Lifetime ISA and its bonus to get to your deposit target. Simply tell us how much you are aiming to save for a deposit, and when you hope to have your deposit by, then we’ll calculate your weekly savings plan.
How does the Lifetime ISA differ to the Help to Buy ISA?
The Help to Buy ISA (not to be confused with the Help to Buy Scheme) also offers the same 25% government bonus on savings, although other details do differ from the LISA. The Help to Buy ISA is no longer available to open as a new product, if you hold an existing HTB ISA you can continue to pay in and use this account until December 2030.
- No additional withdrawal penalties.
- Option to buy a house sooner (once saved £1,600) – it doesn’t have to be open for one year before you can use it.
- Can only save up to £2,400 each year (£3,400 in year one).
- Only one lump sum deposit allowed (in first month) and £200 max monthly thereafter. So if you can’t pay your max amount for a particular month, you’ve missed your opportunity- there’s no roll over!
- Much lower maximum bonus (£3,000)
- Help to Buy will only be available to new savers until November 30, 2019 and bonus must be claimed by December 2030.
Should I choose a Lifetime ISA or Help to Buy ISA?
If you’re very confident that you’re going to be a first time buyer, you’re aged 18-39 and don’t need the money for at least a year after opening, the Lifetime ISA will probably be your winner as it allows for a bigger bonus. You also have the option to keep the account open and continue to use it to save (as well as earn the bonus) as a retirement pot. You can save in it until the day before your 50th birthday, and withdraw the cash and bonus when you turn 60. It is important to understand the withdrawal penalty that applies if you withdraw funds from your Lifetime ISA other than for your first home purchase or retirement.
Can I have a Lifetime ISA and a Help to Buy ISA?
You can have a Help to Buy ISA and a Lifetime ISA at the same time, but you can only use the bonus from one of them towards buying a home.
You can transfer a Help to Buy ISA into a Lifetime ISA, but the amount you transfer will count towards your yearly £4,000 limit – for example, if you transfer £3,000, you can only save another £1,000 in that year.
Getting a foot on the property ladder can seem like a pipe dream, but with the help of the Lifetime ISA, your first home could be closer than you think. 🏠🔑
The standard government withdrawal penalty means that if you withdraw money for any reason other than buying your first home or for retirement, you will have to pay a 25% government penalty on the amount you withdraw. This means you’ll get back less than you’ve put in. Please note, this excludes investment gains/losses for a Stocks & Shares Lifetime ISA.
If you’re using a Lifetime ISA for retirement, it’s treated differently for tax purposes compared to a pension. Remember, tax treatment depends on your individual circumstances and may be subject to change in future. If you pay into a Lifetime ISA and opt out of your workplace pension, you will not benefit from any employer-matched contributions and it may affect your current and future entitlement to means-tested state benefits. If considering the Lifetime ISA for the purposes of retirement, we recommend you speak with an independent financial advisor.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest.