Lifetime ISA

Lifetime ISAs are government-backed savings or investment accounts, offering a 25% government bonus on first home or retirement savings.

 

1. What is a Lifetime ISA?

2. How does a Lifetime ISA work?

3. Who can open a Lifetime ISA?

4. What is the Lifetime ISA allowance?

5. Can I transfer a Lifetime ISA?

6. Are Lifetime ISAs safe?

 
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What is a Lifetime ISA?

The Lifetime ISA (aka LISA) is a tax free, government-backed savings or investment account that was introduced by the government in April 2017. Lifetime ISAs allow UK residents (or members of the armed forces serving overseas) between the ages of 18 and 50 to save for later life or to purchase their first home. 

Since the Help to Buy ISA closed to new savers on November 30th 2019, the Lifetime ISA is the only alternative offering first time buyers the generous 25% government bonus that helps boost their savings for their first home, but Lifetime ISAs have the added advantage of allowing savers to save - and utilise the government bonus - for retirement too.

To be eligible for the government bonus, you’re able to save up to £4,000 per tax year in a Lifetime ISA - anything saved beyond this will not qualify for the bonus. You’re also able to hold either cash or stocks and shares in a Lifetime ISA. 

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How does a Lifetime ISA work?

Lifetime ISAs allow anyone between the ages of 18 and 50 to save or invest, either to help with purchasing their first home, or to prepare for retirement. 

Anything up to £4,000 is eligible for a 25% government bonus - you can save more, but anything further will not benefit from the bonus. So, for every £4 you save, the government adds £1 - up to £1,000 per tax year. Money saved in your Lifetime ISA is deducted from your annual ISA limit, which is £20,000 for the 2019/20 tax year. 

The government bonus is paid into your Lifetime ISA every month, meaning you benefit from compound growth. However, there are some rules on how you can spend the funds in a Lifetime ISA - that is, at least, if you’re wanting to benefit from the government bonus. If you’re under the age of 60, you can only withdraw funds from your Lifetime ISA if they are going towards the purchase of your first home - if they’re not, you’ll incur a 25% penalty. If you are purchasing your first home using your Lifetime ISA funds, you must also wait until your account has been open for 12 months before you’re able to withdraw. If you’re over 60, you can withdraw and spend the funds from your Lifetime ISA as you wish. Withdrawals from a Lifetime ISA are tax free. 

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Who can open a Lifetime ISA?

To open a Lifetime ISA, you must be between the ages of 18 and 39. You can save in a Lifetime ISA until you turn 50, and you can’t withdraw funds - unless they’re going towards the purchase of your first home - until you turn 60. 

Lifetime ISAs are aimed at people who want to either save up to purchase their first home, or save for retirement. If you’re planning on using your Lifetime ISA to buy a house, you must be a first time buyer or you won’t be eligible for the government bonus. 

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What is the Lifetime ISA allowance?

The maximum amount that you can save in a Lifetime ISA while benefiting from the 25% government bonus is £4,000. This £4,000 is deducted from your annual ISA allowance, which is £20,000 for the 2019/20 tax year. You can save beyond this £4,000 in your Lifetime ISA, but those funds will not be eligible for the government bonus. 

If you have a Lifetime ISA, you can still have other types of ISA alongside - such as a Cash ISA or IFISA - as long as your overall contributions are within the annual ISA limit. 

The maximum amount that you could receive in government bonuses is £32,000, provided you saved £4,000 each tax year from the ages of 18 to 50.

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Can I transfer a Lifetime ISA?

You should be able to transfer your Lifetime ISA between providers, but different providers have different rules, and some do not offer the transfer service. You should check with your preferred provider beforehand. 

It’s also possible to transfer your Lifetime ISA to a different ISA, however this is classed as an unauthorised withdrawal, and would therefore incur a penalty of 25%.

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Are Lifetime ISAs safe?

The risk level of a Lifetime ISA (LISA) depends on whether you go for a Cash LISA, or a Stocks and Shares LISA. 

Cash LISAs are similar to a Cash ISA - they’re a deposit account, so your capital is not at risk. The biggest risk a Cash LISA faces is the possibility of the provider you have opened your LISA with going bust. However, Cash LISAs are protected by the Financial Compensation Scheme (FSCS), so if this were to happen, your money is protected up to £85,000. 

Stocks and Shares LISAs have a higher risk attached to them, this is because you would be investing your LISA money directly into stocks and shares, and your funds would therefore be at the mercy of the fluctuations of the stock market. Stocks and Shares LISAs can see a higher return than Cash LISAs if your shared perform well, but this is met with the risk that your shares could perform poorly, putting your money at risk. Stocks and Shares LISAs are also protected by the FSCS - for up to £50,000 - but it’s important to note that this protection only covers your funds in the event of your LISA provider going bust, it does not protect you if your investments perform poorly.