Lifetime ISAs Explained
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Similar to Help-to-Buy ISAs, a LISA provides you with a 25% government bonus towards buying your first home. But, there are some important differences.
With this account you can save up to £4,000 each tax year and can deposit this into the account at your own pace - there's no monthly deposit limit. If you start this tax year you'll get your first bonus in April 2018. After this date the bonus will be paid monthly.
For example, if you deposit the maximum amount of £4,000 before 5th April 2018 you'll get a £1,000 bonus in April 2018.
You may have caught on that a LISA beats a Help-to-Buy ISA on two fronts: You can deposit more, which means more bonus, and the bonus is paid regularly into your account (you don’t have to wait until the property's sale completion). BUT, before you jump in there are some important facts to consider…
Need-to-knows:
#1 There's a minimum term… You have to keep the LISA for a minimum of 12 months before you can use it.
#2 There's also a house price limitation… The limit is £450,000.
#3 Withdrawing money comes with a downside… If you change your mind, you will be penalized by 25%. However, this is after you receive the bonus so not as bad as it sounds. For example, say you deposit £4,000 and receive a £1,000 bonus, taking your balance to £5,000. When you go to withdraw, a 25% penalty is applied and you get back £3,750 which is £250 less than you put in (or 6.25% less).
#4 Age matters... You have to be 18 to 39 years old to open an account.
Do I need to buy a house with a LISA?
Nope. LISA funds can also be used towards retirement. When you’re 60 you can withdraw all your savings from the LISA plus the 25% bonus tax-free. But watch out – this is only a plus if you’re in the lower income brackets (earning less than £43,000 a year) and the reward comes at retirement when you want your cash. Unlike a pension, where you can only take out 25% of your pot as a lump sum tax-free, with a LISA you can withdraw all the money tax-free. Higher-rate or additional-rate tax payer? Sorry guys, LISAs aren’t for you. Stick with increasing your pension pot because your tax relief is way more than the LISA bonus.
How can I open a LISA?
This account was launched in April this year and many highstreet banks aren't offering it yet. But it's available now at stock brokers Hargraves Landsdown, Nutmeg and more will follow as we head towards 2018.
Can I transfer my Help-to-Buy ISA into a LISA?
Yes. But don’t forget you have to keep the LISA for a minimum of 12 months before you can use it so if you're thinking of buying sooner than this stick with your Help-to-Buy ISA.
Anything else?
Unlike Help-to-Buy ISAs you're free to open a Savings ISA and LISA in the same tax-year. Sounds like a win-win situation to us!
Confused about whether to get a Help-to-Buy or Lifetime ISA? Read our comparison guide.