What is a Lifetime ISA?

A Lifetime ISA is a form of Individual Savings Account (ISA) for those ages 18-39 that became available from April 2017; to encourage saving towards buying your first home, or retirement.

Lifetime ISA rules in a nutshell:

  • Invest up to the current tax year limit of £4,000 (subject to contributions made to other types of ISA), without paying tax on the proceeds of the Lifetime ISA. Tax advantages depend on individual circumstances and may change in the future.
  • To open a Lifetime ISA, you will need to be aged between 18 and 39. You can continue to pay into your Lifetime ISA until age 50.
  • 25% government bonus towards the purchase of your first home or your retirement, from age 60. For every £4 you invest the Government tops this up with a £1 bonus, up to a maximum of £1,000 in this current tax year.
  • Anyone under 40 with a Help to Buy ISA can transfer the balance to a Lifetime ISA.
  • Withdrawals can be made for the purchase of your first home in the UK, or from age 60 towards your retirement. Withdrawals that are not for a first time house purchase or not after age 60 will be subject to a 25% Government withdrawal charge. This means you could get back less than you pay in.
  • To avoid incurring a 25% Government withdrawal charge on the amount withdrawn, you must have held a Lifetime ISA for at least 12 months before it can be used for first time house purchase.

How much can I save with a Lifetime ISA?

In the current tax year you can invest up to £4,000 in a Lifetime ISA.  The 25% government bonus is paid monthly straight into your Lifetime ISA and calculated based on the contribution you've make that month.

For example, if you contributed £200 in January, you would receive a £50 bonus from the government. You can receive up to £1,000 in government bonuses in the current tax year.

You will continue to get this government bonus added to the new money invested until age 50, when payments into the account must stop.

What types of Lifetime ISA are available?

There are two types of Lifetime ISA: a cash Lifetime ISA and a stocks and shares Lifetime ISA. OneFamily only offers a stocks and shares Lifetime ISA.

A cash Lifetime ISA is generally intended for short to medium term savings, under 5 years. The value of the account is protected and returns will be determined by the interest rate offered; over the longer term inflation can have a detrimental effect on its true value.

In contrast a stocks and shares Lifetime ISA is designed for longer term investing with a minimum period of at least 5 years or more. This offers the potential for greater returns than cash. However, it is worth remembering that the value of stocks and shares can fall as well as rise; this means you could get back less than you paid in.

When does a Lifetime ISA pay-out?

The Lifetime ISA has two intended pay-out points:

  1. One for if you are a first-time buyer looking to buy your first property in the UK.
  2. And another for withdrawal from the age of 60 to help with your retirement.

If you withdraw your money, other than for either of the intended purposes above, there will be a 25% government withdrawal charge on the amount withdrawn, which means you could get back less than you paid in.

How to use a Lifetime ISA as a first-time buyer

If you are buying your first home you will be able to withdraw up to 100% of your Lifetime ISA balance. The money can then be put towards a first home.
However, first-time buyers looking to invest in a Lifetime ISA need to be aware that:

  • your Lifetime ISA needs to be at least one-year old before you can make a withdrawal to buy a property
  • the property you purchase must be for you to live in, as your only residence and cannot be a buy-to-let
  • you need to be buying a property with a mortgage
  • the property you are purchasing cannot be worth more than £450,000
  • the property must be located in the UK.

How to use a Lifetime ISA
for retirement

From your 60th birthday you can withdraw all of your savings, or start to take out partial amounts. This will be tax-free. Of course, any tax advantages will depend on your individual circumstances, and may change in the future.

If you are self-employed you may find that a Lifetime ISA can help compensate for the lack of any company scheme that would be available to you if you were employed and entitled to a workplace pension.  However, a Lifetime ISA shouldn't be considered as an alternative to a pension, but instead as a way of topping up your savings ready for retirement.

If you have savings this could affect your entitlement to means tested benefits. If using for retirement, in place of a pension, you could lose out on valuable employer contributions. The respective benefits of pensions and lifetime ISA's can be complex, if in doubt please seek independent financial advice.

Looking for more information?

Helping you make informed choices

If you're looking for more information on whether a Lifetime ISA is right for you, these links may help:

  • VouchedFor - Independent financial advice: The information we provide should only be used to help you make an informed decision. If you’re not sure if a Lifetime ISA is right for you, it’s worth speaking to an independent financial adviser.
  • Gov.uk - The Lifetime ISA - Explained: This guide from HM Treasury on the Lifetime ISA. Includes a Lifetime ISA fact sheet and detailed information guide which can both be downloaded and kept for future reference.
  • Money Saving Expert: Martin Lewis and Helen Saxon take a look in detail at the Lifetime ISA and what it could mean for you. Summarised in 15 need-to-know facts this guide includes frequently asked questions throughout.

Interested in finding out more?

If you're interested in finding out more about Lifetime ISAs and if one might be suitable for you, click on the button below to find out more about our OneFamily Lifetime ISA.

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