What Is a Lifetime ISA? Get a 25% Bonus On Your Savings

What is a lifetime isa
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If you intend to purchase a house one day, you need to know about the Lifetime ISA. To find out about 5 other different types of ISA, see my post “ISAs Explained – 6 Tax Free Savings and Investment Accounts”. The Lifetime ISA is tax-free savings account that can, and should only, be used for purchasing a house, withdrawing after retirement (your 60th birthday), or if you are terminally ill with less than 12 months to live. The UK government will add a 25% bonus onto whatever you pay in to your account, up to £4,000, every tax year. This means you could be given £1,000 per tax year, plus interest. Before going any further, it is important that you only put funds into a Lifetime ISA that you are not going to need before you buy a house or retire. This is because there is a penalty of 25% when you withdraw from your Lifetime ISA and you do not use the funds for retirement or for purchasing your first house. This can result in you losing money, here is how:

  • You save £800 into your Lifetime ISA
  • You are given a 25% bonus meaning you are given £200. Your total balance is now £1,000
  • If you withdraw £1,000, you will be charged a 25% penalty meaning a £250 penalty is taken and you can only withdraw £750.
  • NOTE: Because of Covid-19, the UK government has reduced the penalty to 20% meaning that you can now withdraw the same amount as what you put in. This will end of the 6th April 2021.

Conditions

  • You must be aged 18 or over or under 40 when you open your Lifetime ISA.
  • You can keep paying into your Lifetime ISA until you are 50. If you contribute the maximum amount each year, the government will have given you £33,000 for free by the time you are 50.
  • You can pay up to £4,000 every tax year. This would give you a £1,000 bonus each year. This bonus does not apply to the tax years’ ISA allowance meaning you can still put £16,000 into other ISAs.

First-Time Buyer

As a first time buyer, there are some things you need to be aware. If you don’t meet all of the conditions, you may not be able to use your allowance, and you could end up paying a large penalty on withdrawing your money.

  • You must not own a property anywhere in the world
  • The property you are buying must cost less than £450,000
  • You and a partner may both use your Lifetime ISA contribution
  • You need to have had the Lifetime ISA open for at least 1 year before you can use it to purchase a house. Therefore, it is recommended to open one now. Most accounts only required a minimum balance of £1. If you are not happy with the interest rate in the future, you can always switch between providers without any penalty.
  • You can not combine your own Lifetime ISA with your own Help To Buy ISA when buying a house. If you saved into both, you will need to consider which to use. The Help to Buy ISA will not have any penalty to withdraw from but there is a higher bonus potential with the Lifetime ISA.

Retirement

The funds in a Lifetime ISA can be withdrawn, without penalty, after your 60th birthday. If you are young, this may be a large commitment and over such a long time, you may get better returns by investing your money and using a pension may work out better too. This is because when paying in to a pension, it is taken from your pre-tax income as opposed to you paying in to your Lifetime ISA after paying income tax. Your employer will also match your contribution towards your pension. The value of a Lifetime ISA is taken into account when applying for benefits, unlike a pension. This means, you may need to withdraw from your Lifetime ISA, taking a penalty, and spend that money to live, before you can claim some benefits. On the other hand, you can withdraw the full amount of your Lifetime ISA when you are 60, as opposed to only being able to withdraw 25% of your pension.

 

What are you using your Lifetime ISA for? Leave a comment to let others know.

Andrew

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