A lifetime ISA can offer a huge helping hand if you're saving for your first home or want to put money away for your retirement, but how does it work, and is it really worth opening an account?
In 2017 a new type of savings account was introduced; one that was geared specifically for planning for your future. The Lifetime ISA, informally known as the LISA, was the first ISA of its kind, one that could help you save for your first home, and put money away for later life.
According to HM Revenue and Customs, over 223,000 people have opened an account since 2017 - which is no surprise considering the huge advantage it provides first-time buyers when saving for a house. Like other ISAs though, the LISA has specific requirements for applying and taking out money, as well as different implications for saving for a house or for retirement.
Whether you're looking for options to save for yourself or know someone that could benefit from this type of account, here's everything you need to know about the LISA, including who can open one, how it works, and whether it's really worth it when thinking about saving for the future.
Who can open an account?
Any UK resident over the age of 18 but under the age of 40 can open an account. You must
make your first payment into the account before you turn 40, however, once the account is open, you can carry on adding money until you are 50.
What are the different types of Lifetime ISA?
There are two types of Lifetimes ISA; a cash LISA and a stocks and shares LISA. Which one would be best for you may depend on your circumstances and your future plans. For example, if you're intending to buy a house in 2 years' time, you may choose the cash ISA as you can be certain of the amount you'll have saved in that time. If you're thinking more about saving for retirement, you might be better to select a stocks-and-shares ISA that has greater potential to grow your money.
How does the LISA work?
Once you have opened your account you can pay in up to £4,000 a year. This money will gain interest and will be tax-free. You'll earn a 25% bonus from the Government on what you have paid into your LISA. This will accrue until you decide to buy a house and/or use the money in retirement.
How is the bonus paid?
Previously HMRC would pay in a 25% lump sum at the end of every tax year based on what you have saved that year (up to £4,000).
HMRC now calculates the bonus on a monthly basis. Your bonus every month is based on the payments you make into your account from the sixth day to the fifth day of the following month. For example, if in January you paid £50 to your account, but in February you only paid £25, you would receive a £12.50 bonus for January and £6.25 for February.
What happens when I buy a house?
The LISA is for first-time buyers and can be used towards a property of up to £450,000, after 12 months of owning a LISA.
If you're a first-time buyer purchasing a property as a couple, both of you can use your LISAs towards your property. If one of you has already bought a home, then the other person can still use their LISA towards your joint property.
If your purchase falls through then your money will be returned to your lifetime ISA by your solicitor.
What happens when I use the money for my retirement?
You can keep paying money into your LISA until the age of 50. When you retire you can withdraw the money penalty and tax-free to spend as you wish.
When can I withdraw money?
There are three instances in which you can withdraw the money without incurring penalties;
If you are buying a house for the first time
If you are entering retirement
If you are terminally ill with 12 months or less left to live
What happens if I withdraw money outside of these circumstances?
If you withdraw money for anything other than the above reasons, you'll incur a 25% withdrawal charge. The amount of the charge depends on the amount you withdraw.
For example, if you have £1,000 in your LISA and you decide to withdraw all of your money, then the 25% fee will apply to your entire fund, including the bonus. This would leave you with £750.
However, if you only withdraw part of your pot, you'll pay a 25% fee on the money you withdraw. For example, if you have £1,000 in your LISA but you withdraw £500, you'll be left with £375 after the penalty fee is paid.
Can I use the LISA for buying a house and saving for retirement?
Yes. You can purchase a house and continue to keep and pay money into your LISA until the age of 50. You can then start to use your money in retirement without paying any fees.
Is there a limit to how much I can save if I have multiple ISAs?
Yes. The limit for ISAs for 2021-22 is £20,000 and includes other forms of ISAs, not just the LISA. For example, if you have paid the top limit of £4000 into your Lifetime ISA, you will only be able to pay £16,000 into another form of ISA, like a cash ISA.
Where can I open a LISA?
There are lots of different providers for the LISA and it is worth researching several to see which you would prefer. Some providers offer a standard banking experience whilst others operate through an app, with add-on features such as rounding up your recent banking transactions to the pound and depositing this in your LISA to help you save. If you are a client of Chesterton House we can give you guidance on the best choice of provider for you.
What else should I consider?
If you're a first-time buyer saving for a house then the LISA is arguably one of the best options at the moment due to the 25% Government bonus. Due to the 'Help To Buy' ISA being no longer available from 2019, it also means it's the only account of its type with this benefit.
Before the LISA was introduced, the Help to Buy ISA was an attractive way to save for your first property and had similar benefits to a LISA. Help to Buy ISAs are no longer available to open as new accounts, however any existing ones can continue.
For anyone with existing Help to Buy ISAs, you are able to transfer this to a new LISA and it would be worth considering whether to do so as each type of ISA has its own benefits. It is worth noting that although you can save into both Help to Buy ISA (if you have an existing one) and a LISA, only one account can be used to buy your first home.
However, there are other Government schemes available for buying a house - it's worth researching your options before committing to one. You can find details of all the Government buying schemes here.
If you're saving for retirement then the ISA could be a nice addition to your pension pot, however, it's not a worthy replacement for your pension for a few reasons. One is that the LISA has a limit of a £33,000 bonus, whereas your pension limit sits much higher at roughly £1,000,000. If you're considering opening a LISA as an addition to your pension then it's worth considering the benefits of having money split into different accounts compared to saving it all in your pension pot.
Whether you're looking at LISAs for yourself or thinking of recommending it to family and friends, there's no doubt it can be a hugely beneficial type of account when saving for the future. Here at Chesterton House, we believe in planning ahead in order to achieve your goals. If you want to find out how we can help you to live the life you want, you can get in touch with us here to make the first step.
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