Lifetime ISA Explained- Why You Should Open One Now

Saving money can be tough work, especially when there are so many things to save for. A house, a car, the future, fun things like holidays etc. And at the moment interest rates are so low it’s hard to make much on the money you do have. But if you’re looking to save for your first home or retirement then a lifetime ISA (LISA) is likely to be the best bet for you. If you need the lifetime ISA explained from what it is and who can open them through to how to withdraw money from them then you’re in the right place.

Lifetime ISA explained

A LISA is a great way to save for either your first home or for retirement as the government give you bonus top-ups on your money. To open one you must be between 18 and 39 years old and have not opened another ISA within that same financial year. If you have opened one then you’ll need to wait until the next financial year starts.

You can save up to £4,000 a year in a lifetime ISA, and like all ISA’s you can only save up to £20,000 across all ISA’s. So if you max out the 4K in your LISA you can only save 16K in other ISA’s tax-free.

LISA bonus

If you need the difference between a standard ISA and a Lifetime ISA explained it’s mainly due to the government bonus. The government will give you a 25% bonus each year. So if you save £1,000 in the first financial year you’ll get £250. But if you save £4,000 in the second year you’ll get a £1,000 year bonus.

In order to keep the bonus, you can only withdraw the money if you’re:

• Buying your first home
• Over 60 years old
• Terminally ill with less than a year to live

A lifetime ISA to buy your first house

You can use your lifetime ISA savings to buy your first time home if the following conditions apply:

• You’ve never bought a property before in the UK or anywhere around the world
• The property costs £450,000 or less
• You buy the property at least 12 months after you made your first payment into your lifetime ISA
• You’re buying with a mortgage
• You use a solicitor or conveyancer to act for you in the purchase

When you’re going through your application process you’ll need to make your solicitor and mortgage advisor aware that you’re using your lifetime ISA as your deposit, or towards your deposit. You may need to show the account as proof that you do have the funds.  When you’re ready, ask your LISA provider to transfer the cash directly to your solicitor and not to you. But the property purchase needs to complete within 90 days of you sending savings from the lifetime ISA to your solicitor. So chat to them before you request the withdrawal.

If you’re buying with someone else they can also have a Lifetime ISA and you can both take advantage of the government bonus. So it’s well worth having separate accounts to make the most out of it.

Lifetime ISA explained for retirement

You can only add into your lifetime ISA until you’re 50 years old, and then after that, your ISA will chill there earning you interest until you can withdraw it after you turn 60. As we’ve already bought a house this is what our lifetime ISA will be for.

When you hit 60 you can withdraw the whole amount in one go, or you can take out the money as and when you want it. But the longer your money is set aside the more interest it will earn. What you actually do with the money is totally up to you, but it’s designed to be an addition to your pension to help you live when you’re older and retire.

If you open a Lifetime ISA when you hit 30 and save the full £4,000 a year until you hit 50 you’ll have saved £80,000. And the government would have given you £20,000 for free! And that’s without any interest you’ll earn.

Opening a Lifetime ISA

There’s no ‘best place’ to open a LISA, but I’d suggest shopping around for good interest rates. The main thing I’d suggest is making sure they have a good app that’s easy to work. As chances are you’ll be using it a lot.

When you first open your lifetime ISA you can put a lump sum in, you can even max out the £4,000 in one go if you want. Or you can keep adding to it across the year as you want. Unlike other ISA’s you’ll get the full 25% government bonus whether your money is in the account for the full financial year, or just a day before it ends.

You can also open your lifetime ISA as a Stocks & Shares, although this comes with added risk so it’s worth really thinking about.

Common questions

In this lifetime ISA explained post I thought I’d answer some of the common questions I get asked about lifetime ISA’s.

Can you withdraw the money early if you need it?

Life is unexpected so there might be a need to have access to your money early. You can withdraw the money before you buy your first home or turn 60, but you’ll pay a withdrawal fee. This is 25% which recovers the government bonus you received on your original savings. Even though you gain 25% and have to pay a 25% fee, you will actually lose out by 6.25%.

That’s because if you get a 25% bonus of £1,000 you’ll end up with £1,250. But if you pay a 25% withdrawal fee of £1,250 it’s actually £312.50. So you’d get back £937.50

But any interest your money may have made you get to keep.

Can you have both a Help to Buy ISA and a Lifetime ISA?

You can have both accounts open, but you can only use the government bonus from one of them when you buy your first home. You can transfer the money from a Help to Buy ISA to your lifetime ISA to keep everything together. If you do this you’ll pay the 25% withdrawal charge on your Help to Buy ISA cancelling out the government bonus.

If you’re a first-time buyer getting a house with someone who isn’t a first-time buyer can you still use it?

The answer is yes! And I wish I had known this before we bought our house as Luke was a first-time buyer and I wasn’t. The first-time buyer can still have a lifetime ISA and get their government bonus to use towards the house, even if the other person has previously bought a property.

What happens if we withdraw the lifetime ISA but our house purchase falls through?

If the sale falls through it’s outside of your control so you won’t lose out. The funds will go back into your lifetime ISA account and it won’t affect your annual contribution.

Do you have a lifetime ISA? What is yours open for?