Finance > Saving
Lifetime ISA Explained
Up to £32,000 of free money towards your first home or retirement!
In This Article
How Do They Work?
A Lifetime ISA (LISA) is a type of Individual Savings Account (ISA) where you can save up to £4,000 every tax year, and the government will add a 25% bonus on top of your savings. This means that you can get yourself an extra £1,000 of free money every year.
The catch… you can only use this money to put towards a deposit for your first home or retirement. Withdrawals made for other reasons will incur a 25% withdrawal charge. This means you lose your bonus and 6.25% of the deposited money you withdraw, but we’ll cover more on that below.
If you’re unsure on what an ISA is, head back to our guide below to explain first.
Eligibility
- You must be aged 18 or over but under 40 to make your first payment
- You must be a UK resident
Lifetime ISA for Your First Home
As we’ve mentioned, one of the main benefits of a LISA is to save for your first home. This does, however, come with a few conditions:
- First, you must have never owned a property before...anywhere!
You must be a first-time buyer to put your LISA towards a home.
- The property you are buying must cost £450,000 or less and be located in the UK
If purchasing with others, you can save up in separate LISAs and put it towards the house, as long as the property still costs £450,000 or less. Unfortunately, if you and your partner use both of your LISAs towards a new home, the £450,000 limit still applies.
- You must be buying the property to live in
The ISA is designed to help you buy your first home to live in, and therefore, you cannot purchase a property utilising your LISA in which you intend to let out. The property can be rented out if your circumstances change down the line however, when utilising the ISA for purchasing, it must be with the full intent of living in the property.
- Your LISA will only be able to be used 12 months after your first deposit into the LISA account
- If you intend to buy a house within the next 12 months and haven’t made a deposit into a LISA, then opening a LISA is unlikely to be the best option for you
- If you haven’t opened one yet and are unsure whether you want to utilise a LISA, it’s worth sticking £1 into one to get the clock ticking on your 12 months. If you don’t end up using it, you can withdraw 93p and move on
- You must be using a conveyancer or solicitor for the purchase
Why? Your ISA provider will send the money with your LISA to them directly; you don’t personally handle it.
- You must be buying a house with a mortgage
Your LISA funds must contribute towards a deposit; therefore, a mortgage is required. If you are buying a property using cash and want to use your LISA funds, you would need to pay the withdrawal charge.
Lifetime ISA for Retirement
- You can access the money within a LISA at the age of 60
- As you’re in it for the long haul, it might be worth considering a Stocks and Shares LISA, where you can invest the money within the account
Types of Lifetime ISA
There are two types of LISA to choose from, and it essentially comes down to whether you want to invest within it or not. Both types will receive the 25% government bonus.
- Cash LISA
This works similarly to a normal savings account however, you don’t pay tax on your interest.
- Stocks and Shares LISA
This allows you to invest the money within your ISA, and you don’t pay tax on any income or gains.
Withdrawals
You can withdraw money from your Lifetime ISA for the following reasons:
- To buy your first home
- If you are aged 60 or over
- If you become terminally ill and have less than 12 months to live
Any other reason for withdrawal will incur a 25% charge. This means the government gets back the 25% bonus they gave you, plus you pay a 6.25% charge on the amount of your original deposit that is withdrawn.
Example:
You deposit £1,000 into your Lifetime ISA. The government then tops it up by 25%, making the total in your account £1,250.
Situation 1:
You need to withdraw all the money for rent and will pay a 25% penalty on £1,250.
£1,250 – 25% = £937.50
The government have taken back their £250 bonus, as well as 6.25% of the deposited amount.
£1,250 – £250 = £1,000
£1,000 – 6.25% = £937.50
Situation 2:
You need £240 for car repairs. In this case, you need to withdraw more than the required amount in order to cover the penalty.
You will need to withdraw £320.
£320 – 25% = £240
To calculate the figure you need to withdraw, divide your desired final figure by 0.75. The withdrawal figure will be higher to allow for the 25% penalty.
£240 / 0.75 = £320
Make sure you have an emergency fund to avoid early withdrawals!
Frequently Asked Questions
Firstly, a Lifetime ISA can only be used 12 months after your first deposit into the account. For this reason, transferring is only really an option for those who can ensure they have fulfilled this requirement.
A Lifetime ISA generally comes with more benefits:
Deposit Cap:
You can deposit lump sums into a Lifetime ISA (up to £4,000 per year), whereas a Help to Buy is only £200 per month and has a total contribution limit of £12,000.
Bigger Bonus:
Due to being able to deposit more into a Lifetime ISA, your 25% bonus will contribute a larger total amount if you max out your contributions each year.
Lifetime ISA max = £4,000 + 25% = £5,000
Help to Buy max = £2,400 + 25% = £3,000
Property Price:
Lifetime ISAs can be used to purchase a property worth up to £450,000 anywhere in the UK, whereas Help to Buy ISAs can be used to buy a property worth up to £250,000 (or £450,000 in London).
You also need to consider that transferring to a Lifetime ISA will count towards your annual £4,000 allowance. If you have more than that in your Help to Buy, then a partial transfer will need to occur, with the remainder being transferred the following year(s).
Note: You can no longer open a Help to Buy ISA. If you already have a Help to Buy, you can pay into the ISA until November 2029. You can claim the 25% bonus until November 2030.
Yes, you can have both a Help to Buy and a Lifetime ISA, however you can only use one to contribute towards your first home.
Yes, but remember, contributing towards either ISA will take away from your annual ISA limit of £20,000.
You can indeed! Once you have withdrawn some, or all, of your LISA savings for your first home, you can then continue to contribute towards your LISA until the age of 50 (still receiving the government bonus). You can then access all of your savings, penalty-free, at the age of 60.
Whichever provider you open your LISA with will claim the government bonus for you and add it to your ISA. They usually do it every month and you should see it in your ISA account 1 to 2 months after the date you put money in.
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