What is a Lifetime ISA?
A Lifetime ISA (Individual Savings Account) is a savings product designed by the Government to help you save to buy your first home or save for retirement. You need to be UK resident (unless you're a Crown Servant or their spouse/civil partner), over 18 and under 40 to open a Lifetime ISA. You need to make the first payment into your ISA before age 40. Like with any ISA, it needs to be in your sole name as joint ISAs don't exist! So if you purchase your first home with your partner or spouse and they too have a Lifetime ISA then you can both use your Lifetime ISAs towards the purchase of your new home, as long as your home doesn't cost more than £450,000.
The bonus payments are calculated on a month-by-month basis and usually take between 4 and 9 weeks to arrive in your account.
What's so good about a Lifetime ISA?
Well, I know you like free money from the Government and with a Lifetime ISA you get a 25% bonus added to your savings. You can put up to £4,000 into your Lifetime ISA each tax year, until age 50, so the maximum bonus you can get each year is £1,000. Once you turn 50, you can no longer pay into your Lifetime ISA or get the 25% Government bonus, but your account will remain open and still benefit from the interest or investment returns.
Ah, it's my favourite GIF! I do love free money from the Government. What are the limitations of a Lifetime ISA?
If you are using the Lifetime ISA to save for retirement, you cannot access the funds before age 60 without penalty. If you want to use the Lifetime ISA towards purchasing your first home then you need to be aware of the following conditions:
The property must not cost more than £450,000 and must be your first home which you live in (it cannot be used for a holiday home or rental property).
You must be buying with a repayment mortgage.
You need to use a conveyancer or solicitor to act for you when purchasing your home. The Lifetime ISA provider will pay the funds directly to the conveyancer/solicitor.
You need to have had your Lifetime ISA open for 12 months to be able to use it towards purchasing your new home. It may be worth opening a Lifetime ISA with £1 to start the clock, even if you're not sure you will use the Lifetime ISA.
If you use the Lifetime ISA to help buy your first home then you can keep the account if you want to have it to save for retirement.
Can you just go over how and when the bonus is paid?
The bonus payments are calculated on a month-by-month basis and usually take between 4 and 9 weeks to arrive in your account. The bonus is paid on the contributions you make into your Lifetime ISA, not the interest or investment growth. So if you pay £200 into your Lifetime ISA one month, then for that month you will get the 25% bonus of £50 added within the next 4 to 9 weeks. You can save on a monthly basis, put a one off lump sum in for the tax year or just put cash in when you can (up to £4,000 a year). You can therefore get a maximum bonus of £1,000 each year. But remember that you need to have had your Lifetime ISA open for at least 1 year to use it towards purchasing your first home. So it's worth starting the clock by putting a small amount in when you can.
It's worth checking with your provider that your bonus payments are invested in your Lifetime ISA or put in the interest earning cash account as some providers may put the bonus into a non-interest earning cash account. The great thing about an ISA is that the funds grow tax free so any interest or capital growth on the funds will be tax free.
So are there different types of Lifetime ISAs?
Yes, you can invest in a Cash Lifetime ISA or a Stocks and Shares Lifetime ISA, like you can invest in a Cash ISA and/or a Stocks and Shares ISA. With the Cash Lifetime ISA you will get cash interest and the rate of interest will depend on what the provider is offering so shop around! With Cash Lifetime ISAs your money will be sat in cash and may lose value in real terms if the interest rate is below inflation, which it currently is.
The money you put in your Lifetime ISA will count towards the overall £20,000 ISA allowance.
An Investment, or Stocks and Shares ISA, allows you to invest in a range of different investments including stocks, shares, funds, bonds and investment trusts. Depending on where your funds are invested, your gains will be either in the form of dividends, bond interest or capital growth. Again, all gains are tax free as there is no tax to pay within an ISA. Remember that investments can go up and down in value, so you could get back less than you put in with a Stocks and Shares ISA. If you're not sure which investments are right for you, please seek the advice of a professional financial adviser.
Whether you decide to put the money in a Cash Lifetime ISA or a Stocks and Shares Lifetime ISA will depend on several things including your capacity for loss, attitude to investment risk and the number of years you intend to leave the funds within your Lifetime ISA.
OK, so could I open a Cash Lifetime ISA AND a Stocks and Shares Lifetime ISA?
Yes, you can have more than one Lifetime ISA, but you can only pay into one each tax year. You can basically just contribute into one type of ISA in each tax year. So you can contribute into a Stocks and Shares ISA, a Cash ISA and a Lifetime ISA in the same tax year, but only one of each type (so, for example, you can only contribute into one Cash ISA in one tax year). So you can't contribute to more than one Stocks and Shares ISA in a tax year or you can't contribute to more than one Cash ISA in the same tax year. Likewise, you can't contribute into more than one Lifetime ISA in the same tax year. So you can open a Cash Lifetime ISA one year and a Stocks and Shares Lifetime ISA another year and have both open, but just pay into one each tax year.
So just say I pay £4,000 into my Lifetime ISA this tax year, then I could also pay, say, £10,000 into a Cash ISA and £6,000 into a Stocks and Shares ISA in the same tax year?
Yes, you've got it!
The ISA limit for the 2021/2022 tax year is £20,000. The money you put in your Lifetime ISA will count towards the overall £20,000 ISA allowance. So if you put £4,000 in your Lifetime ISA this tax year, you can put £16,000 into other ISAs. You can pay into different types of ISAs in the same tax year so you could split the £16,000 between a Cash ISA and a Stocks and Shares ISA (and/or an innovative finance ISA). The Government bonus which is added to your Lifetime ISA does not count towards the £20,000 ISA allowance.
What if I have a Cash Lifetime ISA and I find one with a better interest rate. Can I move it?
Check with your provider first but you should be able to shop around and move your Cash Lifetime ISA to one with a better interest rate.
OK, so if I decide to open a Lifetime ISA to save towards my first home, what happens if my side hustle suddenly takes off and I can afford a home which is more than £450,000?
Then you won't be able to use your Lifetime ISA towards the purchase of your new home. You'll then have to wait until age 60 to access your Lifetime ISA, if you don't want to pay the withdrawal charge.
What withdrawal charge? What if I want the funds before I'm 60?
Unless you are diagnosed with a terminal illness, you will have to pay a 25% charge if you take money out of your Lifetime ISA or transfer it to another type of ISA before age 60. The 25% charge is worked out on the full amount of savings withdrawn or transferred so you actually end up losing money. Just say you put £4,000 in the Lifetime ISA and got a bonus of £1,000 so your total fund value was £5,000. You then wanted to transfer the funds to a 'normal' Stocks and Shares ISA. The 25% charge is based on the £5,000, so after the charge is taken, the amount transferred would be £3,750, which is £250 less than your original investment of £4,000.
That's why using a Lifetime ISA is only really beneficial if you're buying your first home, which is £450,000 or under, or you want to use it to save for retirement. Also, bear in mind that if you use shared ownership to buy your home, the value of the whole home is taken into account and not just the portion you are buying. So if the value of the whole property is over £450,000, you cannot use your Lifetime ISA towards purchasing it. You really do need to consider if it's possible that you may purchase a home over £450,000 as last tax year (2020/2021), £34 million was paid to the Government in Lifetime ISA penalties!
Do you think a Lifetime ISA is a good way to save for retirement?
So it's one of a number of ways you can save for retirement but I will cover this off in my next post as this one's getting a bit lengthy!
Ah OK, then I will see you soon I guess!
Please note that this is general guidance only and not advice. The information given relates to the tax year the article was written and tax and legislation may change in future years.
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