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What Is A Lifetime ISA?

What Is A Lifetime ISA feature image

Published on:

Written by: Michael Barton

Published on:

Written by: Michael Barton

Michael has almost quarter of a century’s experience in the financial world. This includes trading and institutional sales trading, and in senior positions to VP of Global Equities, as well as Head of Trader Training, at companies including Merrill Lynch (SNC), Cargill Investor Services, and Goldman Sachs. Michael’s experience also extends to providing financial advice as a personal financial advisor in the UK.
This article has been fact checked by a member of the Wallet Savvy editorial team and complies with our editorial standards.

You’ve heard of an ISA, but what is a Lifetime ISA? Here, our financial expert Michael Barton outlines how it can help you make the most of interest and bonuses, plus all the important T&Cs.

If you’re looking to save for your first home or toward your retirement, one of the investment vehicles that should be on your radar is a Lifetime Individual Savings Account (LISA).

Though the amount you can invest is limited, the tax efficiency of ISAs plus the government bonuses you’ll receive make the LISA an incredibly attractive investment for many.

30-Second Summary

A Lifetime ISA (LISA) is a tax-efficient savings tool for UK residents aged 18-39, aimed at helping to buy a first home or save for retirement. You can contribute up to £4,000 annually and receive a 25% government bonus.

However, withdrawing funds for purposes other than buying a first home or retiring incurs a 25% penalty. You can choose between a Cash LISA for tax-free interest or a Stocks and Shares LISA for potential growth through investments.

Can You Invest In A LISA?

To invest in a LISA, you must be between 18 and 39 years of age, and be a UK resident (or what’s called a Crown servant, such as an armed forces member serving abroad). Once opened, you can carry on investing through to your 50th birthday.

You should also be investing toward buying your first home, or toward your retirement.

If you fit into this eligibility criteria, then read on.

How Much Can You Contribute Into A LISA?

You can contribute up to £20,000 into ISAs in any tax year. Of this, you can invest up to £4,000 into a LISA – leaving you £16,000 to invest in other types of ISA, such as a cash ISA, stocks and shares ISA, or an innovative finance ISA.

What Is The LISA Government Bonus?

Here’s where investing in a LISA becomes immediately profitable, and the reason there’s such a strict limit on contributions.

For every pound you put in, the government gives you a 25% bonus. Contribute the maximum £4,000 in a tax year, and you’ll have another £1,000 deposited into your LISA.

However, this government bonus comes at a cost – with the cost being how you can withdraw money from your LISA.

How Can You Use A LISA?

There are two ways to use a LISA:

1. Buying Your First Home

You can use the funds from your Lifetime ISA, including the bonus, to buy your first home, providing the purchase meets the following criteria:

  • The property costs more than £450,000
  • You are a first-time buyer and have never owned a home in the UK or abroad
  • The property is purchased with a traditional repayment mortgage
  • The Lifetime ISA has been open for at least 12 months
Tip
If you are buying a first home with another person, you can both open a LISA
to benefit from ISA tax efficiency and government LISA bonuses.

2. Saving for Retirement

Though you can only contribute to a LISA and receive government bonuses until you are 50, if you’re using it for retirement you cannot withdraw from it until you are 60.

You can, of course, choose to stay invested and continue to benefit from tax-free income and growth.

Can You Withdraw For Other Reasons?

LISAs don’t have the same flexibility as other types of ISA. Sure, you can withdraw money from a LISA at any time and for any reason, but if it’s not for buying a first home or retiring, you’ll be charged 25% on the amount you withdraw.

Therefore, you may get back less than you initially deposited.

However, there are exceptions to this rule – for example, this charge will not apply if the reason for withdrawal is terminal illness or death.

Cash LISAs Vs Stocks & Shares ISAs

You can invest in two types of LISA:

couple with keys to their first home surrounding by moving boxes

A Cash LISA is like a high-yield savings account, except that you’ll earn interest tax-free.

A Stocks and Shares LISA let’s you invest your contributions into investment assets such as government bonds, shares, mutual funds, and ETFs.

This gives your money greater opportunity to grow, but you should remember that the value of investments can go down as well as up. Any income and growth within a LISA is tax free.

You could also opt to have a combination of the two types of LISA.

LISA – FAQs

Six questions that I’m regularly asked when discussing LISAs are:

No, any bonus you earn from a Lifetime ISA does not count towards your annual ISA allowance.

Any bank, investment manager or building society that offers the product.

Yes, you can hold more than one Lifetime ISA. However, you can only contribute to a single Lifetime ISA per tax year.

You can also move your Lifetime ISA to another provider – for example, to get a better interest rate.

If you have an investment Lifetime ISA, it’s important to check with your provider how they treat bonus payments.

Some providers may automatically reinvest bonus payments, which can take advantage of potential growth and increase the value of your fund. Others might place your bonus into non-interest-earning cash accounts, which means you could miss out on interest or potential growth.

If you pass away, all money in your Lifetime ISA will be received by your beneficiaries, including bonuses and interest, without penalty.

However, the funds will lose their ISA tax-free status and will become part of your estate for Inheritance Tax purposes.

Money kept in a Lifetime ISA is treated like money held in other types of ISAs. The 25% bonus is usually considered when calculating the cash-in value. This means it could affect your entitlement to certain benefits.

For example, funds within a Lifetime ISA are treated as savings and could impact eligibility for means-tested benefits.

LISAs – The Bottom Line

If you’re looking to save toward buying your first home or retirement, a LISA offers the incredible incentive of a government bonus. But you must understand the rules. The potential penalties payable if you withdraw for other reasons can mean you receive less than you put in.

Bear this in mind when you invest, and that 25% bonus on your contributions could be the boost your savings need to get you closer to your first home faster or a more financially healthy retirement.

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