What is a Lifetime ISA?

Lifetime ISA J Finance Newbury

Are you saving for a first home or perhaps for retirement? Let the government top up your savings with a Lifetime ISA. Additionally, we summarise the other types of ISA to avoid confusion…

The Lifetime ISA

Saving for a first home or your retirement can be hard – but there is a way that offers tax-free savings – and could see the government topping up your savings by as much as £1,000 each year!

Let us introduce you to the Lifetime ISA

So how does it work? First, you need to be a UK resident and aged between 18 and 40.

You can save up to £4,000 a year, until you reach the age of 50, and the government will add 25% to your savings, up to a maximum of £1,000 a year. You can add both cash and stocks and shares to a Lifetime ISA.

Once you hit 50, you can leave the savings in the ISA, where they will continue to earn interest, but you won’t get the bonus anymore, or be able to add any more funds.

Please do note that your Lifetime ISA savings will count towards your annual ISA limit, which is £20,000 for 2021-2022.

Withdrawing funds

This sounds like an amazing offer, and it is, but of course there are other conditions, which concern withdrawing money from the ISA.

You can only take the money out when you buy your first home, turn 60 or if you are terminally ill with less than 12 months to live. If you take any money out for any other reason, you will be subject to a charge of 25% of the total withdrawn – effectively, paying back the government bonus.

Buying a home 

There are additional rules for buying a home – the money can only be used if all the following apply: the home costs £450,000 or less; you buy your property at least a year after your first payment into the ISA; you use a conveyancer or solicitor for the purchase and the funds are paid directly to them, and you are buying with a mortgage.

If you are purchasing the property with a partner or friend, they can also use a Lifetime ISA but be aware that if they already have a property or legal interest in another home, they will be charged a 25% withdrawal fee.

It’s also important to know that if you have both a Lifetime ISA and Help to Buy ISA, you can only use the government bonus from one of them to aid the purchase of your first property. You should be aware that you can no longer open a Help to Buy ISA but you can learn more about the current Help to Buy Equity Loan Scheme on our website.

There are a number of other ways for first time buyers to get help when buying a home, such as the Help to Buy Scheme as we mention above; the First Homes scheme, which offers a discount on new-build properties; and the Mortgage Guarantee Scheme.

What happens when you turn 60?

If you are using the Lifetime ISA and saving for retirement, you can withdraw the money with no charge after your 60th birthday. If you take it out before then, you will be subject to the aforementioned 25% withdrawal fee.

Also, whatever your age when you die, the Lifetime ISA ends and your inheritors will incur no charge when the account is emptied.

If you are too old to start a Lifetime ISA, you could look at a lifetime mortgage, which allows you to release equity in your home to help fund your retirement.

Other ISAs

There are three other kinds of ISAs. They are: Cash ISAs, Stocks and Shares ISAs, and Innovative Finance ISAs.

  • Cash ISA: Rather like an ordinary savings account, except you don’t pay tax on your interest and the rate tends to be better than an ordinary account. You must be 16 to open one (Junior ISAs are available for 14-15 year-olds); you can only open one Cash ISA in a tax year, and there’s a £20,000 cap on how much you can deposit per year. You can also access your cash when you need it.
  • Stocks and Shares ISA: An easy way to invest in stocks and shares. You deposit the cash and experts invest the money for you. You must be aware, however, that your investment can go up or down, but, as with a Cash ISA, you won’t pay tax on any interest you earn. Investments are best left in this kind of ISA for at least five years, so it’s not ideal if you want easy access to your money.
  • Innovative Finance ISA: An interesting way to invest your money, which involves peer-to-peer lending. Investors are matched up with borrowers (leaving out the middleman, such as a bank) – who may be business owners, entrepreneurs or property developers. There is a high level of risk, but equally returns can be higher too.

If you would like to discuss a Lifetime ISA or any other financial matter, J Finance will be happy to help. Please contact us without obligation.

Established in Berkshire in 2004, J Finance Ltd is one of the leading financial planning companies in the area. We serve clients across England and Wales. If you would like to discuss this subject or any other financial matter, please contact us on 01635 521 300 or email contact@jfinance.co.uk.