Individual Savings Accounts or ISAs are accounts that have a tax free wrapper applied to them, this allows you to save money up to a limit tax free, the Lifetime ISA is one type of ISA.
There are 5 different types of ISAs: Cash, Stocks and Shares, Lifetime, Innovative Finance and Junior. Excluding the Junior ISA you can only contribute to 1 of each in a tax year and all contributions across all ISAs cannot exceed £20,000 each year. In this article we are going to focus on the Lifetime ISA.
- £4,000 maximum contribution per year
- 25% government bonus
- Can save either as cash or through stocks and shares
- Funds can be used either to buy your first house or retirement
- 25% withdrawal penalty
What is a LISA?
The lifetime ISA was introduced by the government as a replacement of sorts to the Help to Buy ISA. LISA savings can be used towards one of two things, to buy your first home or to save for retirement. You must be 18 years old and over but under 40 to open a LISA.
Savers can contribute up to a maximum of £4,000 per tax year with the government topping up your savings by an additional 25%, up to a maximum of £1,000 per year.
The LISA limit of £4,000 counts towards your annual ISA limit, which is currently £20,000 per year.
You can hold either cash or stocks and shares in your LISA, but you can only contribute to your LISA until you are 50 years old. After that you will not receive any government bonus only interest or investment returns.
Withdrawing Money from your LISA
Currently there are only three circumstances where you can withdraw money from your LISA without any penalties:
- Buying your first home
- If you are aged 60 or over
- If you are diagnosed with a terminal illness with less than 12 months to live
If you withdraw your money for any other reason you will pay a 25% penalty on all your account value. So not only would you lose your government bonus but also some of your contributions.
E.g. If you contribute £4,000 in a year and receive the full £1,000 government bonus you would have a total of £5,000. If you decide to withdraw this money you would pay a 25% penalty of £1,250, leaving you with £3,750.
Currently for the 2020/21 tax year the 25% withdrawal penalty has been temporarily lowered to 20% until 6 April 2021.
Buying your First Home
If you decide you want to save for your first home a LISA is a very good option, as you would effectively earn a free £1,000 for every £4,000 you save. So if you needed a £20,000 deposit you would only actually need to save £16,000.
However, there are a few things that need to apply in order to use LISA savings:
- The property must cost less than £450,000
- The LISA account must have been open for at least 12 months
- You must use a solicitor or conveyancer to act on your behalf – the LISA funds will be sent directly to them by your provider
- You must buy with a mortgage
If you are buying a home jointly with someone else, they too can use a LISA to save and contribute to the deposit. However, if they own or have an interest in another property then they will pay a 20% penalty on their savings.
Saving for Retirement
If you use your LISA in order to save for retirement then you will be able to access your funds from the age of 60.
Any withdrawals before the qualifying age will incur the withdrawal penalty.
If someone dies and they have savings in a LISA the account will end on the date of the death. There is no charge to withdraw funds from the account.
LISA or Help to Buy ISA
Which is better, the LISA or the Help to Buy ISA?
While you cannot open a new Help to Buy ISA, existing ISAs can still be used and contributed to until 2029, you can claim the government bonus until 2030. You can only save a maximum of £200 per month to a Help to Buy ISA (£2,400) annually.
The government still tops up your savings by 25% but you only receive the bonus when buying your first home, not during saving.
Again, like with the LISA, there is a set criteria that must be followed when buying your first home with a Help to Buy ISA:
- Must have a purchase price of £250,000 or less (£450,000 in London).
- Be the only home you own
- Be where you intend to live
The solicitor or conveyancer will apply for the extra 25% bonus on your behalf.
The maximum government bonus you can receive with a Help to Buy ISA is £3,000, which is earned after £12,000 of savings over.
The LISA appears to be more generous by the fact that it pays as 25% bonus every year on contributions up to £1,000 per year. Plus you can save more and buy more home.
None of the content in this article should be considered financial advice, I am not a financial advisor and you should always do your own research prior to investing. These are my opinions only.