What is a Lifetime ISA?
A Lifetime ISA (LISA) is a savings account for people between 18 and 39. It enables you to save up to £4,000 every tax year. These funds are to be used for a first home worth up to £450,000 or for retirement after age 60.
The government tops up every Lifetime ISA up to £1,000 each year, which is what makes this savings account attractive to applicants. It means you can essentially get up to £1,000 added to your balance for free each year. Interest is also accrued on your balance, and since it’s an ISA, the interest is tax free.
Lifetime ISA: What you need to know
- Eligibility: To open a Lifetime ISA, you must be aged 18-39. You can use the LISA to buy your first home or to save for retirement. Unlike the Help to Buy ISA, it’s not limited to first-time buyers.
- Savings Limit: You can contribute up to £4,000 per tax year to a LISA. The government provides a 25% bonus on your contributions each year. This means that if you contribute the maximum of £4,000, you will receive a government bonus of£1,000 each year.
- Property Price Limit: Similar to the Help to Buy ISA, the property you intend to buy must be in the UK and cost less than £450,000.However, there is no specific price limit for properties outside London.
- Withdrawal for Home Purchase: To use the LISA for purchasing your first home, the account must be open for at least 12 months. After this period, you can with draw the money, including the government bonus, without penalty, as long as it’s used for the purchase of your first home.
- Withdrawal for Retirement: If you don’t use the LISA for a home purchase, you can access the funds and the government bonus tax-free after age 60 or if you are terminally ill.
Using your LISA savings
To use the funds saved in your lifetime ISA account for your first home, you must have been an account holder for at least a year. If you use the money before the year is up, you’ll face a withdrawal charge. And this wipes out the ‘free money’ provided by the government.
The following criteria must be met to use your savings:
- The property is worth £450,000 or less
- Your LISA has been open for at least 12 months (with funds in it)
- You’re using a conveyancer or solicitor to act on your behalf in the purchase
- You’re buying a property with a mortgage.
If you’re buying a property with someone else who also has a lifetime ISA, you can both use the savings and government bonus towards the purchase. This is only if you’re both first-time buyers and meet conditions necessary for buying your first home.
FAQs
Yes, you can open a new LISA account alongside an existing one. But they must be opened in different tax years. If you hold multiple accounts, you can only pay into one each tax year.
You may withdraw from each of them penalty-free when you buy your first property, provided each LISA has been open for a year. You can also transfer each account into one LISA.
The government tops up your savings by up to 25% a year. For example, if you pay in £2,000 in a single tax year, the government adds an extra £500 for free. At the end of the tax year (April to April), you’ll have £2,500 in your account.