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Help to Buy: Lifetime ISA

Helping first-time buyers save for a deposit
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What is a Lifetime ISA?

A Lifetime ISA is a government-backed savings account that’s geared up to help first-time buyers save for a deposit, and to also help people save for their retirement when they’re over 60.

You can pay in up to £4,000 a year, and the government adds another 25% bonus, so you could get up to £1,000 a year.

Who can open a Lifetime ISA?

Anyone aged between 18-39 can open a Lifetime ISA. If you want to use it to buy a house or flat, you have to be a first-time buyer – so you can’t have ever owned a property before.

If you want to use it when you’re retired, it’s open to everyone.

How do bonus payments work?

The government bonus is paid each month, and is based on what you’ve paid in from the 6th of one month to the 5th of the next month.

So, the 25% bonus you receive in May, for example, will be based on the money you paid into your lifetime ISA account between the 6th of April and 5th of May. It usually takes about three weeks for the bonus to reach your account, so it should be paid by the end of the month.

What types of Lifetime ISAs are there?

You can choose to save into a cash Lifetime ISA or a stocks and shares Lifetime ISA. A cash Lifetime ISA will give you a certain amount of interest while the money is held in there.

A stocks and shares Lifetime ISA will invest your money into, you guessed it, stocks and shares. Most providers will let you choose how risky you want your investment to be.

You can often earn more interest with stocks and shares investments, but there is an added element of risk, as you won’t know whether your investments will grow in value and you could end up with less money than you invested.

Lifetime ISA transfers

It is possible to transfer your Lifetime ISA between providers. Transfers should take no longer than 30 days. You can also transfer funds from other types of ISAs into a Lifetime ISA – up to a maximum of £4,000. Many people have chosen to do this with their Help-to-buy ISA.

You can also transfer the funds of your Lifetime ISA into another type of ISA, however if you do this before the age of 60 you should be aware that this will be classed as an unauthorised withdrawal, so there will be a penalty to pay, which generally leaves you worse off than when you first opened the account.

Using a Lifetime ISA for your first home

If you’re looking to get on the property ladder, a Lifetime ISA can give your savings a fantastic boost. But, you have to pay into your Lifetime ISA for at least 12 months before it can be used towards buying a house, so if you’re planning on buying within the next 12 months – look at a Help to buy: ISA instead.

The property must be worth £450,000 or less, and in any part of the UK. You must be purchasing the property to live in – so buy-to-let purchases are not allowed.

If you’re buying with someone else who also has a Lifetime ISA, you can both put your money and bonuses together, but the maximum property price will still be £450,000.

The money can be used to put down a deposit once you’ve exchanged contracts, as well as for any other related costs – such as removal costs, lender fees etc.

You don’t have to spend all of the money saved into your Lifetime ISA – anything left over can be built on to be used in retirement.

Using a Lifetime ISA for your retirement

Once you reach the age of 60, you can use the money saved into your Lifetime ISA as often and however you like.

You can only make payments and receive bonuses on your money until you turn 50, and you have to wait a further 10 years until you can access the money.

If you save the maximum £4,000 (just over £300 a month) into a Lifetime ISA every year between the ages of 18 and 50, you’ll have an extra £32,000 in government bonuses towards your retirement, and you’ll also have saved £128,000 of your own money, plus interest.

If you have a stocks and shares Lifetime ISA, you’ll also receive any growth your investments make, even during the period of time when you’re no longer paying into the account.

All withdrawals you make are tax-free, as is growth within the ISA.

Your ISA allowance

Paying into a Lifetime Isa makes up part of your annual ISA allowance. For this tax year (2018-2019), that allowance is £20,000. 

While you can only save up to £4,000 into a Lifetime ISA each year, be aware that this will only leave you with £16,000 to save elsewhere. If you exceed your annual ISA allowance, you’ll be charged tax on the extra money and any growth it makes by HMRC.

Withdrawal penalty

If you decide to close your Lifetime ISA account, transfer it to a different type of ISA, or withdraw money for any reason other than buying your first home or when you are over the age of 60, it will be classed as an unauthorised payment and you’ll be charged a withdrawal penalty.

This penalty is 25% of the money being withdrawn. While it might sound like you’d only lose the government bonus, it’s actually more than that.

In addition to losing the government bonus, you’ll also lose a small percentage of your own money and any growth that’s been made on it – so you should try to avoid making extra withdrawals wherever possible.

The only other instance where it is possible to withdraw money without receiving a penalty is if you have been diagnosed with a terminal illness, and have under 12 months to live.

Closing a Lifetime ISA after you turn 40

If you’ve opened a Lifetime ISA and decide to close it after the age of 40, be aware that you cannot change your mind after this point – this is because Lifetime ISAs are only available to those over the age of 18 and under 40.

For more information on Help to Buy and government schemes available to you, take a look at our articles on Help to Buy ISAs, Equity Loan and Shared Ownership.

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