A LIfetime ISA is a form of individual savings account that you can use towards either your first home or for your retirement. As an added bonus the state will add 25% on top of any contributions you make.
This article will take you through how it works and what you need to do to set one up.
This article has been written solely to offer information and does not constitute financial advice.
What is a Lifetime ISA?
A Lifetime ISA allows you to save up to £4000 each year for either a home or your retirement. The state will add a bonus of 25% on top of what you save each year. Anyone aged between 18-39 can open one but you can keep paying into it until you reach the age of 50.
How does it work?
You can save up to £4000 each year in a Lifetime ISA either by putting in a cash sum at once or by contributing small amounts throughout the year. The state will add a 25% bonus on top of whatever you have saved that year. For instance, if you put in £4000 one year the state will add 25% so you will have £5000.
You can set one up anytime between the age of 18 and 39 although you can keep paying into it up until your 50th birthday. After that, you can’t make any contributions but you will still receive interest each year.
When do you get the cash?
You can use the cash either when purchasing your first home or when you reach age 60 and use it for your retirement. When buying your first home you can use the money towards the deposit. If your spouse/partner also has a Lifetime ISA you can use both as long as you are both first-time buyers. Another point worth noting is if you use the money to buy your first home make sure the cash goes directly to your solicitor handling the property purchase. This ensures you don’t end up facing penalties (read more about this later).
If you decide to wait until you retire you can access the cash the day you turn 60. You can either withdraw as a lump sum or make small withdrawals over a period of time. Remember, even though you can’t make any contributions after your 50th birthday you will still gain interest.
A few other need to knows:
- You need to be purchasing a UK residential property under £450,000
- You need to have had your Lifetime ISA for at least 12 months before you can use it for your first home
- If you use the cash to help buy your first home you can keep the account open and start saving for your retirement
- You can transfer your Lifetime ISA to another provider if they offer a better deal (you just can’t have more than one)
What if you already have a Cash ISA?
Not to worry you can contribute to a Lifetime ISA and a Cash ISA (or a Stocks and Shares ISA) at the same time. The overall ISA limit is £20,000 in a tax year which you are allowed to split between a Lifetime ISA and another ISA.
Where can you open a Lifetime ISA?
Below is a list of banks that offer Lifetime ISAs
Moneybox
Minimum Investment: £1
Interest Rate: 0.6%
Access: Mobile App
Beehive Money
Minimum Investment: £10
Interest Rate: 0.5%
Access: Mobile App
Paragon
Minimum Investment: £1
Interest Rate: 0.5%
Access: Online
Q&A
What if you withdraw the money for something other than retirement or your first home?
Strictly speaking, you could withdraw cash before your 60th birthday and use it for a purpose other than buying your first house. However, you will be charged a penalty of 25% for doing so. This is why you should ensure the funds are transferred directly to a solicitor if buying a home.
What if you already have a Help To Buy ISA?
Help To Buy ISAs are now closed to new applicants but existing accounts can still be used. However, if you have a Help To Buy ISA and a Lifetime ISA you cannot use the government bonus from one of them. So if you use the Help To Buy ISA to buy a first home you would need to keep the Lifetime ISA for your retirement (or pay the penalty). If you use the Lifetime ISA you can still keep the cash in your Help To Buy ISA just without the bonus.
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