A simples guide

Lifetime ISA

We’ve all heard of ISAs , but now there’s a LISA – or Lifetime ISA. A LISA is aimed at helping people to save either to buy their first home or to have a little nest egg when they get to retirement age.

Announced by the Chancellor in 2016, Lifetime ISAs are so shiny and new that most banks aren’t ready to offer them, despite having a launch date of April 2017. But it pays to be prepared, so here’s a rundown on what a Lifetime ISA is and what it could mean for you.

Remind me, what is an ISA?

ISAs, or ‘individual savings accounts’, were introduced in 1999. As with other financial products there are lots to choose from, including cash ISAs and stocks and shares ISAs. The advantage of having an ISA over other savings products is that the interest earned on the cash balance or investments is tax free.

But you can’t save as much as you like in an ISA (the government’s not that generous) and there is a limit to how much you can invest each financial year. For the financial year 2017/2018, the limit is £20,000.

It's good to know that you can have more than one ISA, but you can’t exceed your yearly allowance. So, you can have a fixed-rate ISA and an instant cash ISA and put money in both – as long as you don’t go over the £20,000 limit.

money
coins

So what’s a Lifetime ISA?

A Lifetime ISA aims to help those saving for their first property or those saving for retirement to build up a little nest egg. To be eligible, you need to be aged between 18 and 39 before 6 April 2017 (if you turn 40 on or before the official launch date of 6 April 2017, you won’t be eligible).

You’ll be able to save up to £4,000 a year in a LISA, then the government will give you a bonus of 25% on top. That means, if you save the full £4,000, you’ll get an added bonus of £1,000. This bonus will be paid annually in the 2017/18 tax year, then monthly from April 2018 onwards. As soon as this bonus is in your savings account, it counts as your money and you’ll receive interest on it (if the banks pay interest on LISAs.) But you won’t earn a bonus on interest paid into your account only on the amounts you contribute.

You can pay into a Lifetime ISA until you’re 50, so you could potentially receive a bonus of £32,000 if you save your maximum allowance of £4,000 every year from age 18.

As with other ISAs, you can invest in a cash LISA or one that follows stocks and shares.

 

When can I spend the money?

You can take the money out when you’re ready to buy your first home, or when you retire (as long as you’re over 60).

The LISA is a little more generous when it comes to house-buying than a help-to-buy ISA. Not only could you get back more in government bonuses, but the criteria for house-buying is broader.

For example, with your money from a LISA, you can buy a house up to the value of £450,000 (with a help-to-buy ISA, you can only put the money towards a house up to £250,000 outside of London and up to £450,000 within London). There is a catch, though – you need to have been saving for at least 12 months before you can use the money to buy a home.

If you’re buying a home with a partner or friend, then you can both open a Lifetime ISA and use both your allowances for one home. 

What happens if I already have an ISA?

That’s fine – so long as you don’t go over your annual ISA allowance, you can have more than one ISA. Remember, the most you can put into a LISA is £4,000, so that still leaves you with an allowance of £16,000 to put into another ISA.

If you already have a help-to-buy ISA, you can transfer it into a new Lifetime ISA. Otherwise you’ll be able to run both products alongside each other, though you can only benefit once from the bonus towards the cost of the house.

You mentioned retirement. Is it a pension?

No – it’s a savings account, not a pension. If it helps, just think of a LISA as a nice little nest egg to boost your retirement funds. You can still pay into a personal or company pension scheme and benefit from tax relief subject to the current pension tax rules.

Can I withdraw my LISA savings to buy other things?

You could, but you’ll lose all your bonus payments plus the interest that would’ve been earned on those savings. There may also be costs incurred as a result of withdrawing the money.

There are only three situations where you can take out your savings without losing the bonuses and tax-free standing of the ISA:

  • You buy your first house
  • You reach 60
  • You are terminally ill

Not many banks are offering LISAs just yet (and we can’t compare what doesn’t exist), so until then why not check out what a cash ISA or savings account could offer you instead?

All information correct as of 31 March 2017.

Looking for a Quote?

Compare saving accounts in seconds and start saving

get a quote