Entering the property market or preparing for retirement are two significant financial milestones that many of us anticipate. If you’re a UK resident aged between 18 and 39, the government offers a unique savings incentive to help you secure a brighter future. Whether you’re eager to climb the property ladder or are keen on fortifying your retirement nest egg, the Lifetime Individual Savings Account (LISA) / Lifetime ISA has been designed with you in mind. As an initiative by the UK government, LISA aims to make significant milestones like buying your first home or retiring more attainable.
Within this guide, we unravel the intricacies of the Lifetime ISA, offering a clear overview of how it functions, its benefits, potential penalties, and considerations. From understanding how the government contributes a 25% bonus to your savings to the stipulations for withdrawals, this guide covers everything you need to know about LISAs. Whether you’re contemplating opening a LISA or have already embarked on this savings journey, arm yourself with all the essential information to maximise its benefits.
What is a Lifetime ISA?
A Lifetime Individual Savings Account (LISA) is a type of Individual Savings Account (ISA) offered in the UK. It’s a government scheme designed to encourage people to save for their first home or for their retirement.
How a Lifetime ISA works
A Lifetime Individual Savings Account (LISA) operates with the primary goal of encouraging saving towards a first home or retirement. Here’s a simple step-by-step guide:
- Opening an account: The first step is opening the LISA. As long as you’re a UK resident and aged between 18 and 39, you can open a LISA. You can continue to pay into this account until you’re 50.
- Making contributions: You can pay up to £4,000 each tax year into your LISA as a lump sum or by putting in money when you can. This can be done either as a cash LISA, much like a savings account, or as a stocks and shares LISA, where your money is invested.
- Receiving government bonus: The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. The bonus is paid on any contributions you make in the tax year up to the £4,000 limit, and it’s usually paid monthly, allowing for compound growth if you’re investing.
- Using the funds: You can use the money towards buying your first home worth up to £450,000 at any location in the UK, provided you have held the LISA for at least one year. The funds can be transferred directly to a solicitor when you’re ready to buy.
- Accessing the money at retirement: If you’re not using the money for a first home, it can be accessed tax-free once you turn 60. You can use it however you like at this point, providing a supplementary income to your pension.
- Penalties for early withdrawal: If you withdraw the money for any reason other than the above before the age of 60, a 25% withdrawal charge usually applies. The only exceptions are if you’re diagnosed with a terminal illness or in the event of your death.
- Other considerations: The LISA is part of the overall £20,000 annual ISA limit. So if you contribute £4,000 to your LISA, you can only contribute a further £16,000 to other ISAs in that tax year.
It’s important to note that while LISAs can be beneficial, they might not be the best choice for everyone. It depends on your individual circumstances, such as your retirement goals, whether you’re planning to buy a home, and other personal factors. If you’re unsure, it might be worth seeking financial advice.
How is my bonus paid?
In a Lifetime Individual Savings Account (LISA), the 25% bonus from the UK government is typically paid monthly. This means that within a few weeks of your contribution, you should see the bonus added to your account.
The process works like this:
- You make a contribution to your LISA. You can contribute as a lump sum or in smaller amounts throughout the year, up to a maximum of £4,000 per tax year.
- The government calculates 25% of your contribution.
- The bonus is then deposited into your LISA, usually within 4-9 weeks of your contribution.
- This bonus is added directly into the account and can then be used alongside your own contributions to invest in a cash LISA or a stocks and shares LISA.
For example, if you make a contribution of £2,000 into your LISA, the government will add a bonus of £500 (25% of your contribution). This bonus would be added directly into your account, typically within the following month.
Remember that the bonus is paid on contributions, so if you withdraw money from your LISA and then re-deposit it, this will not qualify for a further bonus. The bonus is only paid on new contributions up to the annual limit of £4,000.
Who can get a Lifetime ISA?
To open a Lifetime Individual Savings Account (LISA), you must meet certain eligibility requirements:
- Age: You must be at least 18 years old but under 40 years old when you open a LISA.
- Residency: You must be a UK resident or a Crown servant (for example, in the diplomatic service, overseas civil service, or armed forces) or their spouse or civil partner if you’re living overseas.
- First-time buyer: If you plan to use a LISA to buy your first home, you must be a first-time buyer. This generally means you’ve never owned a home or a share of a home anywhere in the world.
Using a Lifetime ISA to buy your first home
A Lifetime ISA (LISA) can be a beneficial tool for first-time homebuyers in the UK due to the government bonus it provides. Here is a step-by-step guide on how you can use a LISA to buy your first home:
- Opening a LISA: As mentioned, you can open a LISA if you’re aged between 18 and 39.
- Making Contributions: You can contribute up to £4,000 per tax year into your LISA. You can continue making contributions until you turn 50.
- Receiving government bonus: The government adds a 25% bonus to your contributions, up to a maximum of £1,000 per year. This bonus is usually paid monthly.
- Saving for at least one year: You must have opened your LISA at least 12 months before you can use it to buy your first home. This means you can’t use the LISA to buy a house within the first year of opening the account.
- Buying your first home: When you’re ready to buy your first home, you can use the funds in your LISA towards the purchase. The property must cost £450,000 or less, and you must be buying it to live in (not as a buy-to-let). You also must purchase it with a mortgage.
- Solicitor’s role: Your solicitor or conveyancer will submit the paperwork to withdraw the funds from your LISA for the house purchase. They should do this at least 30 days before you’re due to complete the purchase. The funds will be paid directly to them.
- If the purchase falls through: If your home purchase falls through after you’ve withdrawn the money from your LISA, your solicitor should return the funds to your LISA. This won’t count as a fresh contribution and won’t impact your LISA allowance for the year. It must be done within 90 days of the withdrawal, or you’ll face the 25% withdrawal charge.
It’s important to note that the 25% government bonus is only free to use if you’re buying your first home or if you wait until you’re 60 to withdraw it. If you withdraw the money for any other reason, you’ll pay a 25% penalty on the withdrawal amount. If you’re unsure if a LISA is right for you, you may want to seek financial advice.
Buying a property together
If you’re planning to buy a property with someone else, and you’re both first-time buyers, you can each use a Lifetime ISA (LISA) to save for your deposit, allowing you both to benefit from the government bonus.
Each of you can use the money in your LISA, including the government bonus, to put towards the deposit on your first home. The property must cost £450,000 or less, and you must buy it with a mortgage.
This arrangement can significantly boost your collective deposit for your first home, with each of you taking full advantage of the LISA scheme’s benefits. It’s a great way for couples or friends to get on the property ladder faster, provided they both meet the eligibility criteria for a LISA.
Using a Lifetime ISA for retirement
A Lifetime ISA (LISA) can also be used to save for retirement, and it offers some unique advantages over traditional pensions.
Once you turn 50, you can’t make any more contributions to your LISA, but your money will stay in the account and continue to earn interest or investment returns. You can withdraw all the money in your LISA tax-free once you turn 60. You can spend it however you like.
One key advantage of a LISA over a pension for retirement savings is that withdrawals are tax-free. However, keep in mind that with a workplace pension, your employer will usually also contribute, which can add substantially to your retirement savings. You also get tax relief on pension contributions, which effectively means that some of the money you would have paid in tax on your earnings goes into your pension rather than to the government.
Therefore, a LISA may be best used as a supplement to a pension rather than a replacement for it. As with all long-term financial planning, it’s wise to get professional financial advice if you’re unsure which option is best for you.
When can I take money from my Lifetime ISA?
You can withdraw money from your Lifetime ISA (LISA) under the following circumstances:
- You can withdraw money from your LISA without penalty to purchase your first home, provided the property costs £450,000 or less and you are buying it with a mortgage. Also, the LISA must have been open for at least 12 months. The funds are usually sent directly to your conveyancer or solicitor, who will complete the transaction.
- Once you turn 60, you can withdraw all of your LISA funds tax-free and for any purpose.
- If you are terminally ill, with less than 12 months to live, you can withdraw all funds from your LISA without incurring a penalty.
- Upon death, your LISA will end on the date of your death. There will be no charge to withdraw the funds or assets from your account.
However, if you withdraw money from your LISA for any other reason, a withdrawal charge will apply. This charge aims to recover the government bonus received on the original savings and apply an extra charge to the original savings. This charge is 25% of the amount you withdraw.
This means if you withdraw money early, you might get back less than you put in. It’s important to consider this before deciding to invest in a LISA. As always, if you’re unsure, it could be beneficial to seek financial advice.
What happens if you die
If you pass away, the funds in your Lifetime ISA (LISA) will form part of your estate for inheritance purposes.
Here’s how it works:
- Upon death: When you die, your LISA will close. The date of death is considered the closure date.
- No withdrawal charge: Any funds in your LISA can be withdrawn by the executor of your will or your administrator without incurring the 25% withdrawal charge.
- Part of your estate: The value of the LISA will form part of your estate for inheritance tax purposes.
- Inheritance: The money will then be distributed according to your will. If you didn’t leave a will, it will be distributed according to the rules of intestacy.
- Transferred to spouse or civil partner: In some cases, if the ISA is passed to a spouse or civil partner, they can inherit the ISA value as an ‘Additional Permitted Subscription’ (APS) allowance. This would allow them to invest that money in their own ISA without it counting towards their annual ISA allowance. This additional allowance doesn’t apply to LISAs, but only to standard cash ISAs, stocks and shares ISAs, and innovative finance ISAs.