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Should you get a Lifetime ISA?

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Written by Dom James, Financial Content Writer

17 April 2020

The Lifetime ISA lets you earn a 25% bonus on savings up to £4,000 a year. Here is how they work.

What is a Lifetime ISA?

It is a government backed savings scheme that is designed to help you save towards your first home and your retirement.

You can save up to £4,000 a year into a Lifetime ISA and the government will reward you with a 25% bonus based on the amount you pay in during the tax year, up to £1,000. Each tax year runs from 6th April to 5th April.

You will have the option of using your Lifetime ISA as either a cash or stocks and shares ISA, but not an innovative finance ISA.

Compare Lifetime ISAs here

How does the bonus work?

The bonus will be calculated and paid monthly, so you will earn 25% of the amount you pay in over a year up to £4,000.

For example, before interest is added, if you pay in £4,000 during the first year, your balance would increase to £5,000 with the 25% bonus. If you added another £4,000 the next year, you would get another £1,000 bonus making your total savings £10,000.

You stop earning the bonus on your savings once you reach 50 years old, but you can continue to save and earn interest in your ISA.

Can you save into a different ISA during the same tax year?

Yes, you can save into a Lifetime ISA as well as a cash ISA, stocks and shares ISA and innovative finance ISA during the same tax year.

Any money you save will count towards your annual ISA allowance, which is £20,000 in the 2020/21 tax year.

Who can open a Lifetime ISA?

To qualify for a Lifetime ISA you have to:

  • Be at least 18 years old

  • Be younger than 40 years old

  • Have a National Insurance number

Can you have a joint Lifetime ISA?

No, you can only open a Lifetime ISA in your own name.

Can you withdraw from a Lifetime ISA?

You can only withdraw without penalty or charges for the following reasons:

  1. To use as a deposit on your first home (first-time buyers only)

  2. To use during your retirement (from age 60)

If you withdraw money for any other reason, you will face a 25% deduction on the amount you withdraw.

For example, you save £4,000 into a lifetime ISA during the 2017/18 tax year and qualify for a 25% bonus, making your total balance £5,000. If you try to withdraw £5,000, £1,250 is deducted (25% of £5,000 = £1,250), meaning you can only withdraw £3,750.

The exception is if you become terminally ill, then you can withdraw your money without penalty regardless of your age.

If you are saving for retirement

You cannot take your money out without penalty until you reach 60 years old.

From 60, you can choose to withdraw all or part of the money in your Lifetime ISA without any penalty charges.

Any withdrawals you make after you turn 60 will be tax free.

If you are a first-time buyer

  • You can only use your savings and bonus towards a new property worth up to £450,000, anywhere in the UK.

  • To qualify for the bonus, you must have your Lifetime ISA open for at least 12 months.

  • You can keep your Lifetime ISA open once you use your funds for a deposit, and continue savings towards your retirement.

If you are buying your first property with someone else, you can both save into your own Lifetime ISAs and qualify for two government bonuses.

Can you use the bonus if your partner already owns a home?

Yes, if you are a first-time buyer you can use the bonus, even if you are buying with someone who already owns a home.

What if you have a Help to Buy ISA?

You can do one of three things:

  1. Transfer the money into a Lifetime ISA and continue to save

  2. Use your Help to Buy ISA for a property deposit and save into a Lifetime ISA for your retirement

  3. Use your Lifetime ISA with the government bonus and withdraw the money from your Help to Buy ISA to go towards buying your first home

Help to Buy ISA or Lifetime ISA?

You can use both if you are a first-time buyer, but you can only get the government bonus from one of them when using the money to buy your first home.

To get the government bonus on both accounts you need to use them for different purposes.

For example, use the Help to Buy ISA for your deposit on a property and use your Lifetime ISA for your retirement.

Has it replaced the need for a pension?

No, but it can help increase the amount of money you have when you retire.

If you pay into a workplace pension you may get employer contributions. This means you and your employer both pay towards your pension.

Although the 25% bonus is attractive, the Lifetime ISA should only be viewed as an account to support your pension savings.

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