What is a lifetime ISA

A Lifetime ISAs (LISAs) can be opened by anyone aged 18 to 39 within the UK. They offer a 25% bonus on savings used for retirement or buying a first home. If you pay in the maximum of £4,000 this tax year, the government will give you a bonus worth £1,000.

So is a Lifetime ISA, a worthwhile option for you as a savings product.

So let’s look in detail about how they work ?

You can choose to open a cash Lifetime ISA, an investment LISA or a combination of the two. Here’s how they work:  

• You can put a maximum of £4,000 into a Lifetime ISA each tax year.
• You’re paid a 25% bonus from the government, which is usually paid monthly in arrears.
• The maximum bonus you can earn in a tax year is £1,000. (25% of £ 4,000)
• The amount you pay in is linked to your annual ISA allowance (£20,000 for 2024/25) – for example, if you pay £1,000 into your Lifetime ISA, you can still pay £19,000 into other ISA products.
• Any bonus you earn doesn’t count towards your ISA allowance, it is considered exempt.
• You can open a Lifetime ISA with any bank, building society or investment platform, financial institution that offers the product.
• You can hold multiple Lifetime ISAs across different providers, although you can only pay into one each tax year. It may be simpler stick with same provider.
• You can also transfer your Lifetime ISA to another provider, for example to get a better interest rate.
• You can open a Lifetime ISA, a Cash ISA, a Stocks and Shares ISA and an Innovative Finance ISA in each tax year. (up to your total annual allowance of £ 20,000 per tax year)
• You can only pay in contributions until you’re age 50, at who stage you have to cease.

So how does the bonus being paid work ?

If you contribute £1,000 into your Lifetime ISA, as a one-off lump sum. The government will add an extra £250 as a free bonus. This would leave you with £1,250 at the end of the tax year.

If you contribute £ 2,000, the government will normally add an extra £ 500. HMRC calculates bonus payments on a month-by-month basis, based on payments you make into your account from the 6th of the month to the 5th of the following month. 

It could appear out of reach for most people saving up to invest the money in 1 go. But it could prove to be very beneficial if you make regular contributions each month across the tax year.

If you have an investment Lifetime ISA, it’s a good idea to check with your provider as some might treat bonus payments differently. Some will automatically reinvest bonus payments, taking advantage of any potential growth and increase in value.

Your provider might put your money into your account and be held as non-interest earning cash sum. This means you might miss out on interest or future potential growth of your invested fund. It could be sitting in your account as cash, until you make a decision to invest this sum of money.

Who is allowed to open and contribute to a Lifetime ISA ? 

Quite simple you need to be a aged between 18 and 40 at the time of opening the account. You also have to be a UK resident or a Crown servant (for example, a member of the armed forces serving abroad). 

What is the aim or purpose of using a lifetime ISA ?

It is aimed as a savings vehicle or financial product to help people save a deposit towards the purchase of their 1st home. The so-called bonuses act as an incentive for people saving for that specific purpose.

Bear in mind when buying your first home, there are certain restrictions you need to keep in mind:

• Only first-time buyers can use Lifetime ISAs to buy a home, which means you can’t own, or have owned, a home in the UK or anywhere in the world.
• You’ll need to be buying a home for no more than £450,000.
• You must be buying a home you or you partner are planing to live in – the scheme isn’t for buying a home you want to rent out, or a holiday home.
• You must use a traditional repayment mortgage, not an interest only mortgage.

If you are buying with home with a partner, make sure you both meet the eligibility criteria, you can combine your Lifetime ISAs to buy a property together.

For example – If only one of you is eligible, as the other person may already owns a home – only the eligible person can use a Lifetime ISA.

By both individuals contributing to a lifetime ISA it could be a much better option and a much shorter timeframe required to obtain the necessary deposit. As you can both contribute £ 4,000 and the bonus is doubled. So you could contribute up to £ 10,000 across 2 schemes with the bonus included. If you are lucky enough to afford making those contributions. Unfortunately it’s out the reach of most young people as they make have student debt, university fees to pay off.

What if I don’t use my Lifetime ISA for buying a house ?

It could be used an an alternative to saying for your retirement. But most people will usually save for this option via a personal or workplace pension scheme. (to get added tax relief)

You could use this product towards your later years, but you can only access from the age of 60. You can make then make full or partial withdrawals from your Lifetime ISA, without paying a fee.

If the Lifetime ISA provider allows it, the funds can remain invested and any interest or investment growth will continue to remain tax-free.

If you’re self-employed, a Lifetime ISA can be a good equivalent to a Workplace Pension Scheme. 

So when can I access the funds in my Lifetime ISA ?

You can access money in your Lifetime ISA, including the government bonus and without paying any tax, but only under the following conditions:

• you reach the age of 60 (and you use it to fund your retirement or later years)
• you’re 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.

What about withdrawing funds early from 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 25% of the amount withdrawn.

This is worked out after your bonus is paid – remember, 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. This means 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 for retirement. Because of the charges applied by your provider under the rules of this product it may bot be viable for financially worthwhile, if you access the funds early for some reason.

Lifetime ISA (LISA) withdrawal charges increased to £75.2m in the 2023/24 financial year, up from £54.3m the year before, official figures have revealed.

The charges for unauthorised withdrawals were up almost 40% year-on-year, analysis from Hargreaves Lansdown found. Latest HM Revenue & Customs (HMRC) statistics showed 56,900 people used their LISA to purchase their first home in 2023/24. However, 99,650 people made unauthorised withdrawals during the same period. In total £2.4bn was saved into LISAs during the year.

What happens to my Lifetime ISA if I die ?

If you die, any money in your Lifetime ISA, including interest and bonuses, is passed on to your beneficiaries without penalty. This will be arranged by your executors looking after your estate, through simple communications with the respective ISA provider.

However though, you will lose the ISA tax-free status and the funds will form part of your estate for Inheritance Tax purposes.

Remember:

If you found this blog post information useful. Please feel free to check out my other posts on https://moneyminted.co.uk which cover pensions, savings, recommended investing books. So you too can improve your financial knowledge and ultimately reach your investing and financial goals.