We answer your questions on… Lifetime ISA

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June 03, 2021 - Kevin Dunn

We answer your questions on…

Lifetime ISA: use it to save for a house deposit and get a 25% government cash bonus

A Lifetime ISA (Individual Savings Account) is a great way to help you save a deposit for your first home or to save for later in life. It offers a better way to save over other saving schemes or ISAs because with a Lifetime ISA the government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. Sometimes a Lifetime ISA is referred to as a LISA.

This means if you are looking to buy a house in five years time, for every year you save the total allowance of £4,000 into a LISA, the government will add £1,000. So if you save £4,000 a year for 5 years, your £20,000 will have become a saved total of £25,000 with the government having contributed £5,000 for free.

Whilst rising house prices are a challenge for anyone trying to save for a deposit, the Lifetime ISA is a small way to help offset part of this problem.

Who can open a LISA?

To open a Lifetime ISA, you have to be aged between 18 and 39 and be a UK resident. You will qualify for the Government contributions on your LISA until you turn 50, at which time you can no longer pay into the account, and the bonuses stop too.

Your LISA will stay open and you will continue to gain interest on your money long after the bonuses stop. So, if you are lucky enough to be able to open a LISA when you turn 18, and pay in the maximum every year until you turn 50 then you will have amassed £32,000 in Government bonuses.

For those older generations looking to help younger members of a family, funding a Lifetime ISA for an 18 year old is a great way to help secure their financial future.

Does a LISA use part of my annual ISA allowance?

The Lifetime ISA limit of £4,000 counts towards your annual ISA limit. This is £20,000 for the 2021 to 2022 tax year.

Like other ISA accounts, you can hold cash or stocks and shares in your Lifetime ISA, or have a combination of both.

How does the government bonus get paid?

  • The bonus is paid every year you save something in to your LISA, until you hit age 50.
  • The bonus is paid monthly (if you’ve contributed that month) and takes between four and nine weeks to arrive.
  • You only get the bonus on contributions, not cash interest or investment growth.
  • Once in your account the bonus is counted just like the rest of your savings, so you’ll get interest on it too (or investment growth/loss).

Can I transfer cash from other ISAs in to my Lifetime ISA?

 If you already have an ISA, some providers let you transfer money from that into your Lifetime ISA, even if your other ISA isn’t a Lifetime ISA. You can only transfer £4,000 from other ISAs into the LISA in any one tax year.

As with any ISA transfer, anything you’ve moved from a previous year’s ISAs does not affect your overall current tax year’s contribution. So, if you transfer £4,000 into a LISA from a previous year’s ISA in the 2021/22 tax year, you’d still be able to deposit £20,000 into a cash ISA, stocks & shares ISA or an innovative finance ISA (or a split between two or three of these) within the same tax year, but you’ll have used up your Junior ISA allowance for that year.

How do I use my Lifetime ISA to buying my first home

You can use your savings to help you buy your first home if all of the following apply:

  • the property costs £450,000 or less
  • you buy the property at least 12 months after you make your first payment into the Lifetime ISA
  • you use a conveyancer or solicitor to act for you in the purchase – the ISA provider will pay the funds directly to them
  • you’re buying with a mortgage

If I am buying a home together with a partner, can we use two Lifetime ISA accounts towards the deposit?

If the person you’re buying with also has a Lifetime ISA, they can use their savings and government bonus too.

The first time buyer rules still apply, This means that they will pay a 25% withdrawal charge to use their Lifetime ISA savings if they own or have a legal interest in property. This includes more complex situations, such as if they’re a beneficiary of a trust that includes property.

What if I already have a Help to Buy ISA, can I have a Lifetime ISA too?

If you have a Lifetime ISA and a Help to Buy ISA, you can only use the government bonus from one of them to buy your first home.

You can transfer money from a Help to Buy ISA to a Lifetime ISA, but you can only transfer in £4,000 a year. It is important to know that if you transfer money from a Lifetime ISA to a Help to Buy ISA you’ll have to pay the 25% withdrawal charge. Help to Buy ISAs are no longer available to new account openings.

Once I have opened a Lifetime ISA, can I move the account to a new provider?

Once your Lifetime ISA is opened, you’re not locked in to that account provider – you’re free to transfer it if a better interest rate is on offer elsewhere.

Just like with normal ISAs, interest rates on cash LISAs will go up and down – so you’ll need to keep an eye on your account, and be ready to transfer between different LISA providers to up the rate if you see a better deal.

The same is true with stocks & shares LISAs: you may decide to change your investment priorities, or seek out lower fees, in which case you’ll be allowed to move it.

You can hold more than one LISA at any one time, provided that you only pay in to one in each tax year (you can transfer the current year’s money around, provided it’s ALL transferred each time).

What happens if I don’t end up buying a home, can I withdraw money from my Lifetime ISA?

You can use you Lifetime ISA to buy your first home, or if you are aged 60 or over you can withdraw the money to spend as you wish. If you become terminally ill, with less than 12 months to live, then you can also withdraw your money without penalty.

If you want to take out money from your Lifetime ISA for any other reason, you can do this, but you will pay a withdrawal charge of 25% (also known as making an unauthorised withdrawal). This recovers the government bonus you received on your original savings.

Would you like to find out more?

Our team of financial advisers at Furnley House are able to help answer questions you have on investing into a Lifetime ISA and can also help you secure a mortgage to buy your first home. To find our more, call 0116 269 6311 or email info@furnleyhouse.co.uk.

Your home may be repossessed if you do not keep up repayments on your mortgage.