What is a Lifetime ISA?

The Lifetime ISA is the most recent addition to the ‘ISA Family’ and was introduced by the government in April 2017.

How to open a Lifetime ISA

A LISA can be opened by any UK resident, Crown Servant or partner of a Crown Servant from the age of 18 up until their 40th birthday.

It was launched as a dual purpose saving option as you can use the funds you build up in your LISA to help with a deposit for the purchase of your first home or you can build up extra savings that can be taken tax-free any time after reaching your 60th birthday to provide you with a more comfortable retirement.

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Using the ISA to fund your home

If you intend on using your LISA to help fund a deposit on your first home there are a couple of things you need to know:

  • The funds from your LISA can only be used for a deposit on a home worth up to £450,000
  • Your account must have been open for a period of 12 months to qualify for the bonus

The good news: if you are planning to buy with another person and you are both eligible to use a LISA, they will be able to use their LISA too as the LISA is not limited to one per home.

What is the Lifetime ISA allowance?

The maximum annual subscription into a LISA is £4,000 and this will count towards your overall annual ISA allowance, which currently sits at £20,000 for the 2024/25 tax year.

So, if you paid £4,000 into your LISA, you would still be able to make an investment of up to £16,000 into the other types of ISA available to you. You are allowed to open multiple LISAs with different providers during your lifetime but you are only allowed to contribute to a single LISA in any tax year.

A key attraction of the LISA is the government bonus of 25% which is added to any contribution that you make before your 50th birthday. You might also be interested in the key benefits of more generalised ISAs.

This means that if you were to invest £4,000 into your LISA the government would add an extra £1,000 to your account.

When is the Lifetime ISA bonus paid?

The bonus is added at the end of the month following your deposit, which means that it can benefit immediately from long-term compounding growth.

How does a Lifetime ISA work?

You can invest in a Cash LISA, a Stocks and Shares LISA or a combination of both (but not in the same tax year).

If your main goal is to use the LISA for a deposit on your first house then you need to consider how long this money will be invested for.

If you are intending to get on the property ladder within 3 to 5 years of opening your LISA, then it may be worth investing in a cash LISA that protects the value of your capital.

Alternatively, investing into a Stocks and Shares LISA will allow you to invest your money into a range of financial markets, but you must be aware that the value of the invested money can go down as well as up.

Stock markets will often be more volatile, with prices moving up and down over the short-term compared to cash.

However, if you are planning to use your LISA to build up a savings pot for a more comfortable retirement, the long-term nature of this investment will mean that the chances of higher returns compared to cash over the long-term is greatly increased.

Is a Lifetime ISA worth it?

  • You will only be able to contribute into your LISA up until your 50th birthday and if you decide not to use the LISA for a deposit on your first home, you will only be allowed to withdraw money tax-free after your 60th birthday.
  • You are still able to access the money in your LISA before your 60th birthday, but if the withdrawal is not for a qualifying house purchase you will be subject to a 25% withdrawal charge on the total amount you take.

Example: if you were to pay £4,000 in to your LISA, the government would top this up to £5,000. If you withdraw £5,000 from your LISA, you would be charged a 25% withdrawal fee of £1,250, meaning you would be left with £3,750.

However, if you are suffering from a terminal illness you will be able to make withdrawals from your LISA without any penalties.

Do you pay tax on a Lifetime ISA?

All growth within your LISA is free from tax and any withdrawals that you wish to take from age 60 onwards (or earlier if for first home purchase) are also tax-free.

The value of your LISA and other ISAs that you hold (unless of the type qualifying for business relief) will be included in the value of your estate on your death, so there may be some Inheritance Tax to pay depending on your personal circumstances.

Transferring a Lifetime ISA 

You are able to transfer your LISA to another provider if you wish to do so, and this must be completed by the provider within 30 days of your request.

If you decide to transfer to another LISA but have not yet received the contribution bonus on your first LISA, it is the responsibility of the next provider to calculate and claim any bonus due.

If you transfer funds into a LISA from a different type of LISA, then the value transferred will count towards your £4,000 annual LISA allowance for the year in which it is transferred.

If you wish to transfer money from your LISA to another type of ISA, you need to be aware that this will count as a withdrawal from your LISA and the savings will suffer the 25% penalty charge.

Lifetime ISA vs Pension

The LISA is certainly an attractive option if your pension contributions are limited by the tapered annual allowance or if you are self-employed and do not benefit from employer contributions in a workplace pension, as it will allow you to contribute an extra £4,000 per year with the 25% bonus on top, with all growth free from tax.  

However, this needs to be weighed against the fact that you will only be able to access funds in your LISA from the age of 60 without penalty.

You can currently access your pension from age 55 (this will increase to age 57 from 6 April 2028), but a pension will not allow any early withdrawals at all except in cases of serious ill-health.

In addition, only 25% of your pension fund can be extracted tax free. Your pension can also be passed down and, in many ways, is your most inheritable asset.

For some individuals the difference in tax treatment when you die may be an important factor when choosing which type of plan to take out.

A LISA is not necessarily as straightforward as a Cash ISA or a Stocks and Shares ISA but, if the plan conditions are complied with, the 25% government bonus will be retained and so, for those eligible, the LISA can be a useful addition to your savings portfolio.

If you are keen to learn more about the Lifetime ISA and how this could help you or a family member achieve your financial goals speak to an adviser for more information.

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