I know what you’re thinking. Is it too late for me? Well, friend, I will assume you’ve stumbled upon this post in need of a complete breakdown of what a Lifetime ISA is. I’ll be explaining why you can’t pass on having it, how it works, and provide additional information to help you walk away feeling confident to decide if opening one is right for you.
Lifetime ISA explained
In 2017 the Lifetime Isa became the latest addition to the tax-free Individual Savings Account Family. Here are the core benefits that make this type of Isa unique:
- You can use it to save a deposit for your first property
- You can use it to save for later life
- It’s flexible in that you can have it as cash, stocks, and shares account or both
- You get a 25% bonus on what you save each month/year. Maximum of £1000
It’s surprising how many people in the UK are unaware of the Lifetime Individual Savings Account (Lifetime ISA). Not only are they missing out on the benefits of having one, but they also wait too long to open an account. If you are 18-39 and have plans to become a first-time buyer and or want to put money aside for retirement, this post is for you.
Deadlines for opening an account, contributing and withdrawing
As with all government-led tax-free savings and investment accounts, there are rules and deadlines you need to be aware of:
- Eligibility is from your 18th to 39th Birthday
- You cannot contribute towards your Lifetime ISA over the age of 50
- You can withdraw without penalty from age 60 or over. The only two penalty-free exceptions are using the money to buy your first home after 12 months of opening an account or if you are terminally ill and given 12 months or less to live.
Lifetime ISA rules
So what’s the catch? While your money will grow tax-free, there are rules and limitations to how you can save and how much bonus you will receive.
- You can save up to a maximum of £4000 a year in your Lifetime ISA account (Approx. £333.33 a month)
- You will receive a 25% bonus from the government up to a maximum of £1000.
Would you agree having a Lifetime ISA account is a no-brainer? That means you can save a maximum of £5k a year for your first home or towards retirement. In five years, that’s a whopping £20k of tax-free savings.
Now that you know the basics you probably want to learn more about how to open one? Who the Lifetime ISA providers are? How does the bonus work? Deep dive into Lifetime ISA for first-time buyers, retirement, and withdrawing penalties.
Opening a Lifetime ISA
To open a Lifetime ISA is pretty straightforward. You will need to be a UK resident (or Crown Servant) and have a National Insurance number. As it stands, high street banks do not offer Lifetime ISA accounts.
According to This is Money, In 2017, banks did not have much faith in the scheme and predicted it would become a flop. Four years on, although the scheme is proving popular banks are still not offering Lifetime ISAs. This means the only way to open an account is with an online building society or investing platform.
Lifetime ISA providers
The good news is you can open as many Lifetime ISA accounts as you want. The not-so-good news is you can only contribute to one account per tax. This is a general ISA rule that applies to all types of ISA accounts. Another way to overcome this type of restriction is by switching providers when interest rates become competitive.
Here is a list of online building societies and investing platforms you can open a Lifetime ISA with:
- Hargreaves Lansdown
- Newcastle Building Society
- AJ Bell
- Moneybox (cash LISA)
- Moneybox (S&S LISA)
- Nottingham Building Society
- Building Society
Please note this list is not exhaustive, and we are not promoting any particular one. Please do your research.
How to decide who the best provider is
This is where people run into trouble. They take too long to decide which provider to go with. When it comes to deciding which provider to go with, consider the following and make a decision quickly:
- Interest rates vary from one provider to another
- Annual charges
- Associated fees related to Stocks and Shares ISA
- Flexibility to have both cash and stocks and shares (some providers only offer one or the other)
- The minimum deposit required to open an account
Lifetime ISA bonus
It gets better. The bonus is 25% on what you save each month/tax year. The maximum bonus you can get is £1000. But that’s not all. If you open an account at the age of 18 and contribute until the age of 50, that’s a total of £32-£33,000 (depending on what year you were born) of free money. Bear in mind your overall return doesn’t include your contributions, interest, and growth; if you add compound interest, this pot of money could add nicely up over time.
Lifetime ISA for First Time Buyers
With millennials struggling to save a deposit, the Lifetime ISA is a scheme to help First-time buyers get on the property ladder.
Here are vital things to remember if you plan to use your ISA contributions to buy your first property:
- You can use it to buy your first property 12 months after making your first payment
- It must be your first property and one you intend to live in
- It must be a property in the UK
- The house value must be less than £450,000
- You can use your Lifetime ISA to purchase a shared ownership property
- Both you and your partner can combine your Lifetime ISA to buy your first property (if they already own or are a beneficiary of a trust that includes property, they will pay a 20% withdrawal charge)
- You can continue to pay into your Lifetime ISA for retirement or close it after using the money to buy your first property.
- You must complete the purchase within 90 days of receiving the ISA payment from the funds manager.
Lifetime ISA for retirement
One main issue is that, once you hit 50, you can no longer pay into your life Time ISA, and will no longer receive a bonus. However, what makes the LISA look attractive for those over 50s is that your money will accumulate in interest for the next ten years when you can withdraw at the age of 60 and over without paying withdrawal fees.
Lifetime ISA withdrawal
In case you are wondering, what if I want to withdraw my money earlier or for reasons other than buying a house or for retirement? The rules say you can withdraw early, but you will be subject to Lifetime ISA withdrawal charges. The usual charge is 25%. Surprisingly, this was reduced to 20% due to the financial impact of Coronavirus on individuals’ circumstances in 2020/2021.
Here’s what’s important, be sure to check the current rules for Lifetime ISA withdrawal fees as they may change over time. Nevertheless, remember the withdrawal fees are there to deter you from taking money out for reasons other than buying your first home or after the age of 60 when you retire. In saying that, knowing you can withdraw if you really need the money, is a good thing.
Is lifetime ISAs here to stay?
Over the past few years, the government has engaged in several discussions to consider amending the withdrawal rules. Firstly, as a result of the pandemic, there are talks around exempting account holders from withdrawal charges if they withdraw for reasons other than buying a house or for retirement. Secondly, they are talking about allowing savers to lend against your Lifetime ISA and paying it within a given time to avoid fees.
But, this is neither here nor there. What we do know is that with so many people are struggling to save a deposit to buy their first home and to save for later life, government schemes such as the Lifetime ISA may be the only hope of doing so.
It’s a wrap
In conclusion, there are several benefits to having a Lifetime ISA and an excellent way to put your money to work. You may already have a Lifetime ISA and want to keep yourself up to date with rules and regulations or think it’s time you opened a Lifetime ISA. If you qualify for an account and are between the age of 18-39, be sure to open one. even if you are ready to make massive contributions, you will still have until you are 50 years old to make contributions. Not only is this is a fantastic opportunity to benefit from the 25% bonus (Save £4000 and get a £1000 bonus every year) to buy your first property and save for retirement. In addition, it’s tax-free.