What is a Lifetime ISA?

Lifetime ISAs can help you save for your first home or your retirement. Here's how they work.

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Lifetime ISAs, also known as LISAs, are a type of independent savings account that help you save for your first home or retirement.

How do lifetime ISAs work?

A lifetimes ISA is a type of ISA where the government gives you a bonus of 25% of what you pay in up to a maximum of £1,000 per tax year.

You can put a maximum of £4,000 into a Lifetime ISA each tax year. The amount you pay in is related to your annual ISA allowance (£20,000 for 2020/21).

This means that if you pay £4,000 into your Lifetime ISA, you can still pay £16,000 into other ISA products.

You can only open one of each type of ISA in a tax year. So you can open a Lifetime ISA, a cash ISA, a stocks and shares ISA and an innovative finance ISA in each tax year.

Make the most of your tax-free ISA allowance.

How is the bonus calculated?

Bonus payments are now calculated on a monthly basis. Any bonus is calculated based on payments you make into your account from the 6th of the month to the 5th of the following month.

Who can get a lifetime ISA?

Anyone aged between 18 and 39 who is a UK resident can open a lifetime ISA. You can save up to £4,000 each tax year, every year until your 50th birthday. You can withdraw your funds at any time to buy your first home worth up to £450,000, and from age 60 for any purpose.

You can read more about whether a Lifetime is right for you in our guide.

Using a lifetime ISA to buy your first home

If you want to use your lifetime ISA to buy a home, here are a few things to be aware of:

  • You can only use a LISA if you are a first-time buyer. This means that you cannot own, or have previously owned a property in the UK or anywhere in the world.

  • The property can only have a maximum value of £450,000

  • The property must be a home you intend to live in. It cannot be property that you want to rent out or use as a holiday home.

  • The property must be purchased through a traditional repayment mortgage.

Can I buy a property with my partner using a lifetime ISA?

If both you and your partner want to buy a property together using Lifetime ISAs, you can combine both your LISAs to do so, provided that both of you meet the eligibility criteria.

If one of you owns or has owned a property before, only the eligible party can use their lifetime ISA towards the purchase.

Using your lifetime ISA for retirement

When you turn 60, you can make full or partial withdrawals form your lifetime ISA, without paying any fees or being taxed.

When can you withdraw your money without being taxed?

You can withdraw any money from your lifetime ISA, including the bonus:

  • when you reach the age of 60

  • if you are diagnosed with a terminal illness

  • when you’re buying your first home and your account has been open for 12 months.

  • if you close your account during the cooling-off period, however, you won’t get the 25% bonus.

Can I withdraw money from my lifetime ISA for any other purpose?

If you need to withdraw money from your ISA for any other reason than the ones mentioned above, you'll have to pay a withdrawal penalty. This charge is 25% of the amount withdrawn.

So if you get a bonus, and had £2,000, you’d have a total of £2,500 to take out. The 25% penalty charge is £625, so you’d only get £1,875, which is less than you originally invested.

Due to the coronavirus (COVID-19) outbreak, the government has reduced the lifetime Isa withdrawal penalty to 20% (down from 25%) between 6 March 2020 and 5 April 2021 to help savers who need to access their savings early.

This is why a Lifetime ISA is best suited for those who want to use it to help buy your first home, or to save for retirement.

Can you transfer a lifetime ISA?

Technically, transferring your LISA from one provider to another is allowed and shouldn't take more than 30 days. However, many providers don't offer this facility.

It's also possible to move money from a lifetime ISA to another type of Isa. However, this will count as an unauthorised withdrawal so you will have to pay the 25% penalty - 20% if made between 6 March 2020 and 5 April 2021.

What happens if you die?

If you die, any funds in your LISA will be transferred to your named beneficiaries, without any penalty. However, the funds will lose any tax-exempt status and will be considered as part of the estate for inheritance tax purposes.

Help stretch your budget a little further by making the most of your savings.

About Salman Haqqi

Salman is our personal finance editor with over 10 years’ experience as a journalist. He has previously written for Finder and regularly provides his expert view on financial and consumer spending issues for local and national press.

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