Lifetime ISAs Explained

What is a Lifetime ISA?

A Lifetime ISA or individual savings account, is a tax free savings account into which a saver can put up to £4,000 per year with the Government adding another 25% or £1,000 per year. This means that, using the lifetime ISA account you could save £5,000 per year tax free. The savings in this ISA do count towards an individual’s ISA limit which is £20,000 for the 2022 to 2023 tax year. You earn interest on the savings and do not have to pay tax on that interest as long as you don’t exceed your annual ISA savings allowance.

Who is Eligible for a Lifetime ISA?

Anyone between the age of 18 and 39 can open a lifetime ISA. The moment you hit 40 you can no longer open an account. Clearly the earlier you start the more money the Government will add to the pot.

How does a Lifetime ISA work?

You can open a Lifetime ISA the moment you turn 18 and you can start saving money up to a maximum of £4,000 per year. You can hold stocks and shares in the ISA in any ratio you want from 100% cash to 100% stocks and shares. The bonus money from the Government is paid every month that you contribute and is calculated based on the amount deposited so any share growth or interest is not used in the calculation. You can contribute up until your 50^th Birthday at which point no new money can be put into the account and no new bonuses will be added. The account will, however, still accrue interest. So, if you start saving at 18 and contribute a full £4,000 every year, then the maximum amount the Government will add is £33,000. Anyone can pay into a Lifetime ISA on your behalf but they can’t open one for you. If you have an existing ISA, some providers will allow you to move cash from that ISA to the Lifetime ISA subject to the £4,000 cap.

Withdrawing money from a Lifetime ISA

There are three circumstances under which money can be taken out of a Lifetime ISA penalty free:

• If you buying your first home and it is used towards the purchase, subject to a maximum property value of £450,000
• If aged 60 or over you can access the money penalty free
• If you are terminally ill, with less than 12 months to live. In this case you can access the money and the bonus payments penalty free.

You can withdraw money at any other time, but this incurs a 25% unauthorised withdrawal penalty of the amount being withdrawn, this means that you could end up with less money than you invested, for example:

You put in £1,000 and get a £250 bonus. You now have £1,250 and decide to withdraw it all. You will be charged 25% of the £1,250 which is £312.50 leaving you with £937.50, some £62.50 less than you invested in the first place.

Buying your first home

Under the current rules, you can use the money to buy your first home if:

• The property costs £450,000 or less
• You buy the property at least 12 months after you make your first payment into the Lifetime ISA
• You use a conveyancer or solicitor to act for you in the purchase – the ISA provider will pay the funds directly to them
• You’re buying with a mortgage

If you want to buy a property worth more than £450,000 then you can still use the money but will be charged for an unauthorised withdrawal so if you want to get a property that’s worth than £450k a lifetime ISA might not be the right way forward. You can buy a property with someone else who has a lifetime ISA subject to the same £450,000 cap on the purchase price and that other person also needs to be a first-time buyer.

The Lifetime ISA is a good way to save for a house deposit. Pooling your resources with someone else who also has a Lifetime ISA is a great way of getting on the property ladder sooner so why not look into the scheme and see how you can benefit?

In all circumstances, when making a financial decision it is best to seek professional advice that will be based upon your personal circumstances. This article is for information purposes only and should not be relied upon instead of professional advice.