If you’re aged 18–39, a Lifetime ISA could help you save towards the deposit on your first home or retirement by offering up to £32,000 as a tax-free government bonus.
What is a Lifetime ISA?
For every pound you deposit into your Lifetime ISA, up to the maximum £4,000, the Government will give you a 25% bonus. This means you could earn £1,000 free each tax year – and this bonus is paid in cash each month, so you’ll start gathering interest on it right away.
However, there’s a catch: you can only use your Lifetime ISA to pay for the deposit on your first home, or from your 60th birthday onwards. If you withdraw your savings at any other time, you’ll pay a 25% penalty – cancelling out your bonus.
What types of Lifetime ISA are available?
You can choose from either a cash ISA, or a stocks and shares ISA. Both offer tax benefits. You won’t pay tax on any interest earned on a cash Lifetime ISA, or on any personal returns you earn from a stocks and shares Lifetime ISA.
Can you use a Lifetime ISA with other ISAs?
You can use your Lifetime ISA in tandem with other ISAs, so long as the total you deposit across all your ISAs in each tax year is within the £20,000 limit.
This means you can open both a Lifetime ISA and a Help to Buy ISA – though you can only use the Government bonus from one of these when you purchase your first home.
Should you choose a Lifetime ISA or a Help to Buy ISA?
The Help to Buy ISA is best for people who want to save monthly towards their first home, but you’ll need to save for at least four years to get the maximum bonus of £3,000. You can also only deposit £200 each month.
With the Lifetime ISA, however, you could deposit £4,000 a year in lump sums to receive the maximum yearly bonus of £1,000. And, unlike the Help to Buy ISA, you can accumulate interest on this bonus. The maximum total value of your bonuses could reach £32,000, but even if you save for just four years, you could earn a greater bonus than you would with a Help to Buy ISA.
Furthermore, while the Help to Buy ISA can only be put towards properties worth up to £250,000 (£450,000 in London), the Lifetime ISA can go towards any property worth up to £450,000.
What are the rules around Lifetime ISAs?
You can only open a Lifetime ISA if you are aged 18–39, and you can only deposit money until you are aged 50. If you choose not to purchase a first home with your Lifetime ISA, you will have to wait until your 60th birthday to access your savings.
If you don’t want to wait until you’re 60, you can withdraw early, but you will pay a 25% penalty on everything you take out.
There is an exception to this rule: if you discover you have less than 12 months to live, you can withdraw the full amount (including your 25% bonus) without any penalties.
What if you want to use your Lifetime ISA for both a first home and retirement?
If you use your Lifetime ISA to pay for the deposit on your first home, the account will remain open and any money left over will continue to be saved. This means, after purchasing your home, you can start building your retirement savings in the same account.
How much could you save?
If you opened your Lifetime ISA on your 18th birthday and deposited £4,000 a year until you were 50, not only would you have saved £128,000, you will also receive a Government bonus of £32,000. This means you would have saved £160,000 – and this is without taking annual interest or capital gains into account.