In this guide we help you to understand the how the government's Lifetime ISA can help you save for your first home or your future. We also explore the conditions associated with the account and how much money you can receive in bonuses at the end of each year.
What is a Lifetime ISA (LISA)?
The Lifetime Individual Savings Account (Lifetime ISA or LISA) was launched by the government in 2017 to help people start to save:
- In order to get on the property ladder by building up a deposit
- To boost their retirement savings by building up a fund for the long term
You can use your Lifetime ISA both for saving up a property deposit or your retirement, if you wish.
What is an ISA?
An ISA is a savings account set up by the government. It's known as an Individual Savings Account and was launched to encourage people to save more.
Everyone has their own individual ISA allowance each tax year (which runs from April 6 for 12 months). For the 2020 to 2021 tax year your ISA allowance is £20,000. This is the maximum you can save in the tax year.
What are the rules for LISAs?
The Lifetime ISA (LISA) forms part of this £20,000 annual allowance, with up to a maximum of £4,000.
You can save money in an ISA and/or LISA by putting in a lump sum or adding amounts when you have spare cash. Or you can set up a regular payment each month that goes directly into your ISA account.
You can have various types of ISA, but the most common ones are Cash ISAs, which hold money on deposit, Stocks & Shares ISAs, which invest in the stockmarket, and LISAs, which can hold cash or shares.
How does a Lifetime ISA (LISA) work?
You open a LISA and save into it, up until you reach the age of 50 – either in regular amounts, a lump sum, or paying into it when you have spare money.
All the money in your LISA grows tax-free – so you don’t need to pay tax on it and you don’t need to declare it on your tax form if you fill one in each year.
When you open a Lifetime ISA account the government will top-up what you invest with an additional 25% bonus, a maximum of £1,000 per year. It's a generous bonus - for every £4 you save the government will add £1. The maximum you can save each year into your LISA is £4,000.
Each person has an annual £20,000 ISA allowance each year. If you put £4,000 into a LISA, you still have £16,000 to put into another ISA account. The maximum of £4,000 in a LISA counts towards your overall £20,000 allowance.
How do I get a Lifetime ISA?
You can get a LISA from a bank, building society or fund manager. Bear in mind that this type of savings account is for the long term, and you will lose your tax advantages, and may have to pay a penalty, if you withdraw the money early or use it for something other than buying a house or your retirement.
Currently there is a 20% charge for withdrawing from your LISA before the age of 60, this has been reduced because of COVID-19 and will go back up to 25% on 6 April 2021.
How do I get my LISA bonus?
Your Lifetime Individual Savings Account bonus is paid automatically into your account.
Your Lifetime ISA manager will claim the bonus for you and it will be added to your savings total. You don't have to fill in any forms or make a claim yourself.
Can I have a Lifetime ISA and an ordinary ISA?
Yes, you can have a Lifetime ISA and an ordinary ISA. You're allowed to hold two or more ISAs at the same time. This is because each adult has a £20,000 ISA allowance but only £4,000 can be saved in a LISA.
You could open a LISA, save the maximum, and then open an ordinary Cash ISA or Stocks & Shares ISA and invest the remaining £16,000 of your allowance each year.
What are the benefits of a Lifetime ISA?
The main benefit is the 25% percent cent bonus from the government, which is tax free. However, it does come with some obligations – you need to use it for a house or your retirement.
Can anyone open a Lifetime ISA?
It's meant to give a boost to younger people, so you must be over 18, but under 40 in order to open a Lifetime ISA. You can continue paying into it until you're 50 and earning the bonus.
You can put in up to £4,000 each year. While the plan runs until you are 50, you can still continue to hold your LISA, but you do not get the government’s 25% bonus added to your savings and you cannot make any more contributions.
However, once you’re 60 you won’t be charged to withdraw your money from the LISA. If you still wish to have an ISA, you will need to use an ordinary Cash ISA or Stocks & Shares ISA instead.
What are the drawbacks of a Lifetime ISA?
The important thing to remember about your annual ISA allowance is that if you don't use it in one year, it expires. You can't carry it forward like some pension contribution allowances.
The drawback of a LISA is that your money is tied up for the long term. If you wish to take out or withdraw your money for something other than your house deposit or retirement, then you will have to pay the 20% withdrawal fee.
What is the difference between a Lifetime ISA and a Help to Buy ISA?
You can no longer open a new Help to Buy ISA. If you already have one you can continue to save into it until 30 November 2029, or transfer it to a LISA.
The difference between a LISA and Help to Buy ISA is that you can save more into a LISA than into a Help to Buy ISA.
With the Help to Buy ISA you're not charged to withdraw money. However, as there is a maximum amount of £200 you can pay in each month, any money you withdraw can't be replaced. You will also forfeit the government bonus of 25%.
If you have both, you're allowed to keep them alongside each other, but you can only use one bonus towards your first house purchase.
- You can save £4,000 a year in a Lifetime ISA
- You can save £2,400 in a Help to Buy ISA
- The LISA allows you to save more if you're trying to build up a deposit quickly in order to buy a house or flat.
While the Help to Buy ISA is now closed for new applications, this should not be confused with the government’s Help to Buy ownership scheme, which is still available.
How can I use my Lifetime ISA savings to buy my first home?
You can put your LISA savings towards a property as long as it is in the UK, you're a first-time buyer, and your property is worth less than £450,000.
If you’re buying with someone, you can combine your LISA savings and bonuses together as a couple, but your property must still be less than £450,000 and you must be buying with a mortgage.
How can I use my LISA for retirement?
If you've saved into a LISA and have used it for a house deposit, you can still continue saving into it until you're 50.
When you reach 60 you have access to the money without paying a fee. Before age 60, you may have to pay a withdrawal fee. However, the government has currently reduced the withdrawal fee to help people who are suffering financial difficulties as a result of the COVID-19 crisis.
Can I switch between LISA providers?
Yes, just like other types of ISAs, you're not obliged to stay with the provider of your Lifetime Individual Savings Account provider.
You can transfer funds, bonus and investments to a different provider if you wish.
If you're looking for the best Lifetime ISA provider you may need to shop around – LISA providers change their rates regularly and you will need to compare LISA rates to ensure that you're still receiving a competitive interest rate on your savings.