Lifetime ISAs

Lifetime ISAs explained

Those aged between 18 and 39 can open a Lifetime ISA and continue to save into their account until the age of 50. You need to be a UK resident (or Crown Servant).

A Lifetime ISA is a savings account that can be used to either help fund the purchase of your first home or to supplement your pension , once you are aged 60 or over. This may appeal particularly to those who are self-employed and do not have a personal pension.

You can put up to £4,000 a year into a Lifetime ISA and this counts towards the tax-year annual ISA limit of £20,000.

While you simply have to be 60 to gain access to your LISA for retirement purposes, withdrawing the funds for a house purchase is a little more complicated. First of all, you really have to be a first-time buyer, so you can't already own a home (even as buy-to-let) or commercial property anywhere in the world. Second, the home you buy must be in the UK and worth at most £450,000, purchased with a mortgage and for you to actually live in (though you may be able to rent out the property at a later date).

You and your partner can both be first-time buyers with your own LISAs, and both funds will count, but the property still can't be worth more than £450,000. Furthermore, you will have to have held the Lifetime ISA for at least 12 months to get the bonus.

There'll be no tax to pay, as the money will go straight to a conveyancer or solicitor. The funds will be used at exchange, with the purchase needing to complete within 90 days of the savings being withdrawn (if the purchase falls through, the LISA savings will be returned to your account). Talk to your solicitor or conveyancer beforehand to make sure your LISA funds are eligible and how to arrange for them to be used (don't withdraw the cash yourself as you'd be penalised, as explained below).

When it comes to retirement saving, you can withdraw the money in the account at any time after the age of 60, to use however you like, although the LISA is designed specifically to support people in retirement. You don't have to take it all out at once - you can make partial withdrawals to supplement your income, for example. Any money you leave in could still grow/gain interest and remains tax exempt.

Although the Government bonuses stop once you reach 50, and you're also no longer able to add additional funds after that time, you'd still gain interest (or potential investment gains) on your savings during the 10 years you'd have to wait to gain access to your pot. You'd also still be able to move your funds between Lifetime ISA providers to benefit from better rates.

• If you are employed, then your employer will also contribute to your pension.
• Your contributions into a pension come from your gross salary, so if you are a basic rate taxpayer, a £100 payment into your pension only costs you £80, whereas a Lifetime ISA is paid from your net salary.
• If your company offers salary sacrifice, you can also reduce the amount of national insurance contributions you make.
• Your pension savings are not taken into account if you need to claim employment benefits; while funds in a Lifetime ISA may need to be withdrawn before you can qualify for means-tested benefits and you will incur a 25% penalty to get to your cash.
• If you struggle financially and need to declare bankruptcy, any savings you have will be seen as assets and will need to be cashed in. Pension funds are usually protected.
• You can start to draw down funds from your pension pot from aged 55, compared to 60 to make a withdrawal from a Lifetime ISA.

• All withdrawals from your Lifetime ISA are free from income tax, while you can only claim 25% of your pension tax-free.
• Some pensions for those employed by the Government only allow access to funds at state retirement age.

There is only a small number of providers currently offering Lifetime ISAs. 

• The list above contains the providers of cash lifetime ISAs.

• The Share Centre has a ready-made Lifetime ISA, which has three funds available and can be opened without a minimum deposit.
• Moneybox operates a Stocks & Shares Lifetime ISA. This can be opened form £1 and has a total of seven funds available.
• Forester Life offers a Lifetime ISA with a starting balance of £20 and a required minimum monthly investment of £20. It has two funds available.
• One Family has a Lifetime ISA with a minimum deposit of £250 and a regular monthly investment of at least £25. It has 2 funds available.
• Hargreaves Lansdown offers a Lifetime ISA with a minimum opening amount of £100 and a regular monthly minimum payment of £25. There are 2,500 funds available.
• AJ Bell has an account called Youinvest Lifetime ISA. The minimum to open this account is £500. The minimum monthly payment is £25 and there are 3,900 plus funds available.
• Unity Mutual offers a Lifetime ISA (capital protected) that can be opened from £1. The monthly payment must be at least £25 and there is only one fund available.
• Foresters Friendly Society has a Lifetime ISA. You need £500 to open this stocks and shares account and be able to make a minimum monthly payment of £100. They only have one fund available.

A Lifetime ISA comes with the advantage of a 25% cash bonus from the Government. Interest rates may be higher on other savings accounts but a Lifetime ISA allows you to grow your savings pot over time, with the benefit of a maximum of £1,000 per year contribution from the Government, depending on the amount of your contributions.

You can put up to £4,000 a year into a Lifetime ISA, and get a 25% bonus from the Government (which is paid monthly), resulting in a maximum of £1,000 a year extra. As you can open such an account at the age of 18 (until you're 39) and the Government will add a 25% bonus until the age of 50, this means that you have the potential to earn a maximum bonus of £32,000.

Note that you only receive the bonus on the savings you put in, not on any investment growth or interest that is accumulated, but that you will be able to make gains on the bonus amount. The compounding effect means this could soon add up, which is why it benefits everyone that since 6 April 2018 the bonus is paid on a monthly basis.

You can open a Lifetime ISA if you're a UK resident (or Crown Servant) aged between 18 and 39 years old. There are no other restrictions to open one, although it would be best to make sure you won't need the funds you put in for any reason other than saving for retirement or buying a first home. This ensures that you don't end up having to retrieve your money and paying a penalty, which we'll cover below.

If you're looking to buy your first home in the next few years, or simply want an additional way to save for retirement, and don't mind locking away up to £4,000 per year for your future, then a Lifetime ISA might just be for you. While pensions are still the best way to save for later life, an extra £1,000 a year is certainly nothing to be sneezed at.

Additionally, you won't have to pay any tax on the money that is in an ISA, and you'd earn interest or make potential investment gains on the bonus as well as your own savings over the years, which could all add up. Of course, once you reach 60 and take money out of the ISA, you will become liable for taxation depending on what you do with the money.

One potential negative when it comes to Lifetime ISAs is that most providers currently only offer a stocks and shares LISA, with only a few cash Lifetime ISAs currently available. This means that many savers would have to invest your annual £4,000 in the stock market and risk the possibility of negative returns, albeit for the potential of much higher gains.

The good thing about the LISA's access restrictions, in combination with the stock market, is that investments tend to do best over the long term. This means that, unless you are planning to take the money out of the Lifetime ISA in a year's time, the long-term benefits could outweigh the risks. This is down to personal preference, however, and your attitude towards risk.

• The Government subtracts 25% of the balance you withdraw from your Lifetime ISA if this is used for any other purpose than to buy a new house (if under the age of 60) or for your retirement (if you are over 60), or if you have a terminal illness with less than 12 months to live.
• For instance, if you paid in £1,000 and received a bonus of £250 (25%), you would have a total of £1,250. If you decided to withdraw this for a purpose outside of the Lifetime ISA rules, then you would pay a penalty of £312.50. So, £62.50 of your own deposits would be required for the penalty.
• Be confident that you want to invest for the medium to long-term to avoid penalties and to make sure you have the savings you need, when you need them.
• If you have a critical illness you can make a withdrawal but this will incur a 6% penalty of the funds withdrawn.

There are four types of ISA: the cash ISA, stocks and shares ISA, innovative finance ISA and Lifetime ISA. You can only open one new ISA of each type per tax year. There's nothing stopping you from opening all four types of account, for instance by putting the maximum amount in a Lifetime ISA and the rest of your annual ISA allowance in a cash ISA (or a stocks and shares ISA, an innovative finance ISA, or split between the different types).

Currently, the ISA limit is £20,000, which means that if you put the maximum in a Lifetime ISA, you would still have £16,000 to distribute between the other types.

You can have as many as you'd like, but you will only be able to open and pay into one per tax year. This effectively means that you'll only get the Government bonus paid on one of your LISAs, but it also means you wouldn't be able to benefit so much from the effects of compound interest on your accumulated savings. Particularly for the purposes of buying a house, it would be much simpler to have your savings combined in a single Lifetime ISA; your solicitor/conveyancer might not even accept multiple accounts.

The Government's generous 25% bonus is calculated and added to your LISA on a monthly basis (from 6 April 2019). This does not, however, mean that you will be able to access it. As stated, the Government bonus gets paid directly through the solicitor when buying a house, and subtracted (plus a penalty) if you decide to take your money out before the age of 60 unless you are terminally ill. You will only see the bonus yourself once you're 60 and your Lifetime ISA cash becomes fully available.

Lifetime ISAs remain open to new investors as long as they meet the criteria for the product. Help to Buy ISAs, which were another Government scheme aimed at savers, closed to new savers on 30 November 2019. If you open a Help to Buy ISA before this date, you can still pay into it until 30 November 2029, while the bonus must be claimed by 1 December 2030.