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Lifetime ISA

The basics of Lifetime ISAs

In a nutshell

• You must be between 18-39 to open one
• You can save up to £4,000 a year
• Must be for a first home OR retirement
• Beware of the hefty withdrawal penalties

What is a Lifetime ISA?

If you’re aged between 18 and 39, the Lifetime ISA (also called a LISA) offers a tax-free way to save – but with an appealing extra. You can save up to £4,000 a year and get a 25% top-up from the government, i.e. a free £1,000 a year! This account has been designed solely to be used either for the purchase of a first home OR for retirement. However, it can also be used for both. For example, after one year, you could withdraw some of your LISA savings to fund a mortgage deposit. Whatever remains in your account could be used to fund your pension.

If you withdraw your cash for any other reason, you'll have to pay a withdrawal charge of 25%, effectively nullifying the government bonus you received on your original savings. It's also important to note that a Lifetime ISA can only be used to purchase a property worth less than £450,000, which you could find limits your house-hunting somewhat.

And, if you're using a Lifetime ISA to save up for retirement, you won't be able to access the cash without a penalty fee until you turn 60. On the plus side, however, if you're looking to buy a house with a partner who is also a property first-timer, you can both open a LISA and pool your funds together!

Is a Lifetime ISA right for me?

LISA holders can access a 25% bonus from the government, which sounds great at first, but you can only use that money for 2 reasons - buying your first property or retiring - so it may not be best for your specific needs.

How much could I save with a Lifetime ISA?

Unlike the Help to Buy ISA (which has been closed to new applicants since 2019), the Lifetime ISA can have a stocks and shares element. Stock markets are volatile, so if you think you’ll be buying that flat in the next few years, then the stock market is probably not your best bet. But if this is for a longer-term saving plan, then it’s definitely worth considering.

In 2018, for example, the FTSE 100 went down by about 12%. But over the last 5 years, it’s gone up by about 15%. It is volatile, however, and the main thing is to avoid being a forced seller into a slump.

Over 32 years (assuming you start at 18 and continue to save until you are 50), you could potentially squirrel away £128,000. The government will top up £32,000 in bonus contributions, and if we assume an average of 5% growth (not guaranteed, folks, so example only!), you stand to earn an additional £235,319.

The benefits of Lifetime ISAs

  • Get a bonus of up to £1,000 a year until you’re 50 - that’s up to £32,000 free cash from the government!

  • Great if you're certain that you want to buy a house or that the money’s for retirement

  • Access the stock market’s potential too, unlike its predecessor, the Help to Buy ISA

  • If your partner is also a property first-timer, you can both use a LISA to save up

Can I move a Help to Buy ISA to a Lifetime ISA?

Yes, you can. People generally consider moving if they want to access the stock market, not just cash, or if they can save up to the maximum £4,000 a year and so benefit from the total government bonus. The big caveat is that there were no hefty withdrawal fees on the Help to Buy ISA if you changed your mind and just closed the account. However, remember that there is a hefty penalty charge on all contributions you make into a Lifetime ISA if you withdraw the money and don’t use it for a property or retirement.

You can choose to transfer all - or just some - of the Help to Buy ISA into a Lifetime ISA, as long as you don’t transfer more than the annual £4,000 LISA allowance during a single tax year (which runs from 6 April). If you have more than £4,000 in a Help to Buy ISA, you’ll have to stagger the transfer over more than one tax year and do it in two hits. And you'll be foregoing the penalty-free withdrawals of the Help to Buy ISA. So think carefully about whether this is definitely the right choice for you.

Also, a Lifetime ISA needs to have been opened for at least 12 months before you can use it to buy your first home, so bear this in mind if you're considering switching close to when you purchase a property.