Would a Government ISA aimed at first-time buyers aged under 40 and pension savers suit you? Here's how the Lifetime ISA works.

Q. What is a Lifetime ISA?

A. A new kind of ISA which offers a Government tax-free bonus of up to £1,000 each year. The money can be put towards buying your first home or towards your retirement savings. Like regular ISAs, the Lifetime ISA is available as a cash ISA or stocks and shares ISA.  

Q. When did they launch?

A. On 6 April, 2017.

Q. Who can open one?

A. Anyone aged 18 to 39.

Q. How much can I pay in?

A. Up to £4,000 a year, until you reach age 50.

Q. How does the Government bonus work?

A. For every £1 you save into the account, the Government will contribute another 25p tax-free. So, on the maximum £4,000 a year contribution, the tax-free bonus will be £1,000.

Note that the bonus is calculated only on your contributions. So, while tax-free interest on your cash or growth in your investment will also be paid into your account, it won't count when the bonus is calculated. The bonuses are paid monthly.

Q. What is the maximum bonus I can receive?

A. As you are able to save into a Lifetime ISA between the ages of 18 and 50, the maximum total contributions over this time amount to £128,000. This means the maximum bonus you can receive from the Government is £32,000.

Q. How much can I pay in each month?

A. You can save as much or as little as you like into the account each month, provided you don’t exceed the annual £4,000 limit.

Q. How do I put the money towards my deposit?

A. So long as 12 months has passed since you opened the account, you are free to use the money you saved in the Lifetime ISA (along with any interest/investment growth/tax-free bonus) to help towards your deposit which is paid at exchange of contracts. This is different to the Help to Buy ISA where the bonus only becomes available at completion.

The property you are buying must cost no more than £450,000 anywhere in the UK. Again, this is different to the Help to Buy ISA where prices are capped are £250,000 (£450,000 in London).

It must be the first home you've ever owned, purchased with a mortgage and you won't be able to rent it out.

Q. Where can I open a Lifetime ISA?

A. Three providers now offer a cash Lifetime ISA. Newcastle Building Society (1.1%), Skipton Building Society (1%) and Nottingham Building Society (1%). 

Stocks and shares Lifetime ISAs are more plentiful and available from the likes of AJ Bell Youinvest, Hargreaves Lansdown, Nutmeg and The Share Centre. As with all investments, there is a risk that a stocks and shares ISA may go down as well as up in value.

Q. I already have a Help to Buy ISA. Is it worth switching to a Lifetime ISA?

A. If you are already saving into a Help to Buy ISA, you will be able to transfer these savings into a Lifetime ISA.

  • You can transfer the funds (plus any interest) to a Lifetime ISA at any point during thetax year, as long as your provider allows it
  • The transfer of previous year's ISAs will not affect your overall tax year's contributions. ie. You can still save £20,000 tax-free into an ISA

  • But transfers from a Help to Buy ISA will count towards your £4,000 Lifetime ISA allowance

Alternatively, you can continue saving into each account separately. However, you’ll only be able to put the bonus from one of the accounts towards buying a property.

Q. What about using it as a pension pot?

A. If you already own a property so don't need to save towards a deposit, you can keep any cash saved in a Lifetime ISA until you reach 60 to put towards your retirement income. At that point, you can take all the savings tax-free. Or you can withdraw a regular tax-free income from your fund.  

Q. What if I want to use the money for something else?

A. Withdrawals are permitted, but you’ll lose the Government bonus – including any interest and growth on it – and you’ll pay a 5% charge on the entire fund to boot. Therefore, is a last resort and Lifetime ISAs should really only be used for buying a first home or saving for retirement.

Q. What if I already have other ISAs?

A. You can pay in up to £20,000 into your ISAs. The sum can be split between different ISA accounts, whether cash, stocks and shares, or the Lifetime ISA.

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