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. And it just got even better with a recent government announcement!
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!
New government announcement – Lifetime ISA withdrawal rules temporarily changed
The government has temporarily reduced the Lifetime ISA withdrawal charge from 25% to 20% between 6 March 2020 and 5 April 2021. This change has been made to support people whose incomes may have been affected by Covid-19, but applies to everyone.
The 20% government charge is if you withdraw money for any reason other than buying your first home (up to £450,000) or for retirement. This means you will lose any government bonuses you have earned.
Here’s a working example of the reduction:
The standard Lifetime ISA withdrawal fee is 25%. So if you deposit £1,000, you get the 25% govt. bonus = £1,250. If you make a withdrawal and 25% was taken off, you’ll receive £937.50, which is an additional 6.25% loss. Please note this does not take into account any investment gains/losses and fees for a Stocks & Shares Lifetime ISA.
During the period of 6 March 2020 and 5 April 2021, the withdrawal charge is 20%. So if you deposit £1,000, you’ll get the same 25% govt. bonus = £1,250. If you make a withdrawal and 20% is taken off, you’ll receive £1,000. Please note this does not take into account any investment gains/losses and fees for a Stocks & Shares Lifetime ISA.
We think this new announcement is fantastic news as we have been calling for the government to make changes to the withdrawal charge for some time. We will be pressing for this reduction to be made permanent to allow greater flexibility for our customers who are saving for their first home or for retirement using the Lifetime ISA.
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 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.
- The government withdrawal charge will go back to 25% after 5 April 2021 and will apply if you withdraw within one year of opening or for reasons other than buying a first house or when you reach retirement age. This means that when you make a withdrawal, you will lose your government bonus, plus £6.25 for every £100 deposited (excluding investment gains/losses and fees for a Stocks & Shares Lifetime ISA).
Use our house buying calculator to see how much you could save for your first home with a Lifetime ISA vs cash savings account. Simply select how many years you think you will need to save for your first home and how much you can save per year, and we’ll work out the rest.
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. 🏠🔑
There is a 20% government withdrawal charge unless you use the money towards buying your first home (up to £450,000) or for retirement (from age 60). The effect of this will be to reduce the amount withdrawn (including investment gains/losses) by 20%. Please note this is a temporary reduction from 6 March 2020 – 5 April 2021. After this period the government withdrawal charge will revert to 25% (you’ll pay an additional £6.25 for every £100 deposited). The value of your investments can go up and down, and you may get back less than you invest.
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.