Lifetime ISAs have a lot going for them. We explain what they are, how they work and who can get one. We also compare Lifetime ISAs with their nearest counterpart - the now closed Help to Buy ISA scheme.
What is a Lifetime ISA?
A Lifetime ISA, or LISA, is a type of account designed to encourage people to save for their first home or their retirement.
Key facts about a Lifetime ISA:
- You can save up to £4,000 a year
- The government will top this up with a 25% bonus, paid monthly
- You can earn interest on the government bonus
- You can open an account if you’re aged between 18 and 40
- You can use the savings towards a deposit on your first home home, or towards pension income in retirement
- You must have an account for at least a year in order to qualify for the government contribution
- You can switch Lifetime ISA accounts at any point
What are the advantages of a Lifetime ISA ?
As well as offering two options for how you use your savings and government bonus, the Lifetime ISA has several other things going for it:
- You can earn a significant bonus: the maximum bonus you can earn with a Lifetime ISA is £32,000
- The government bonus is earned annually so you can earn interest on this sum as well as your own savings, which you can’t with a Help to Buy ISA
- You can use the Lifetime ISA money to buy any home (not just new builds) worth up to £450,000, or put it towards your pension income after you reach 60.
- You can pay in lump sums (whereas the Help to Buy ISA only allows you to contribute monthly at a maximum of £200 each month)
What are the disadvantages of a Lifetime ISA?
Unfortunately you can’t take out a LISA if you’re aged 40 or over.
Furthermore, the earliest you could withdraw your savings to buy a house and still receive your bonus is one year after the account was opened, because you must have held it for a year to qualify for the government contribution.
It’s important to understand that if you withdraw money from your LISA for any reason other than buying a house, reaching the age of 60, or being diagnosed with a terminal illness, you’ll have to pay a withdrawal charge. And it is a very hefty charge: 25% of the amount withdrawn. So, for example, if you saved £100 and the government boosted this to £125, you’d actually only be able to take out £93.75 once the penalty is factored in – and that means you’d end up with less money than you saved originally.
That’s why a Lifetime ISA is only really suitable if you want to use it to help buy your first home, or to save for retirement.
What is the Help to Buy ISA?
Help to Buy ISAs are no longer available. They closed to new applicants in November 2019. If you got a Help to Buy ISA before the deadline, here’s everything you need to know, including how to claim the 25% bonus, whether it’s worth transferring to a Lifetime ISA and how to get a better rate by changing provider.
Help to Buy ISAs were introduced in 2015 to give first-time buyers a savings boost: for every £200 deposited, the government will add £50. This means savers get a 25% bonus on their tax-free savings.
What you need to know about the Help to Buy ISA:
- There’s no minimum monthly deposit – but the maximum amount you can save a month is £200
- To get the bonus you need to have saved a minimum of £1,600.
- The maximum bonus you can receive is £3,000 (for which you would have saved £12,000)
- You will earn interest on your savings, so shop around for the best account from different banks and building societies
- You won’t earn interest on the government bonus as this is only accessible to you when you purchase a property
- If you’re buying with a partner, you can both save with a Help to Buy ISAs and benefit from the savings bonus
- Those who already have an account will have until December 2030 to apply for the bonus.
How does the Help to Buy ISA bonus work?
The 25% bonus can be drawn down when you buy your first home, and will be applied for by your conveyancing solicitor as part of the conveyancing process. The cost of the home must not exceed £250,000 unless the property is in London, where the limit is £450,000. The bonus cannot be used to purchase a buy-to-let property, but it can be used on older homes as well as new build.
You have until December 2030 to apply for the bonus.
What about saving for pensions?
A Help to Buy ISA can’t be used for retirement saving.
Whether or not the Lifetime ISA is a better option than a pension is much more complicated and you should seek proper financial advice.
We would encourage you to do plenty of research on how best to save for your retirement and, if you need more help, speak to an Independent Financial Adviser (IFA).
How do I transfer a Help to Buy ISA into a Lifetime ISA?
You can hold a Help to Buy ISA and a LISA. If you hold both you can only use the government bonus towards buying a house via one of the accounts.
You can transfer a Help to Buy ISA into a LISA, but the amount you transfer will count towards your yearly £4,000 limit – for example, if you transfer £3,000, you can only save another £1,000 in that year.
Can my partner and I both get one?
You can take out one Lifetime ISA per person – so couples or friends buying together could each get a bonus, as long as you meet the eligibility criteria.
Can I use the government bonus towards a deposit on a property?
You can use the Lifetime ISA bonus towards the deposit for your first home, because you receive the bonus monthly.
With the Help to Buy ISA, however the bonus is not received until after completion so it can only be used for a mortgage deposit. See our advice on how to buy your first home.
A word of warning:
There is no guarantee that future governments will maintain these offers, which means there could be a risk to bonuses. And it’s not easy to access your money tied up in a LISA – the withdrawal payments are expensive, so don’t save more than you can afford to lock away.
If you think you might need to access your savings, you should consider another form of instant access savings accounts.
What happens if the house I am buying with my ISA falls through?
If the sale of your house falls through, your conveyancing solicitor would have to ensure the bonus is paid back.
An overview of Help to Buy ISAs and Lifetime ISAs
|Help to Buy ISA||Lifetime ISA|
|Who can open it?||Any first-time buyer over 16||Anyone aged 18 to 39|
|Maximum yearly contribution||£2,400 (£3,400 in year one)||£4,000|
|Transfer lump sums?||No – monthly savings||Yes|
|What’s the maximum bonus?||£3,000 (if you contribute the maximum over four years and eight months)||£33,000 (if you contribute the maximum every year between ages 18 and 40)|
|When is the bonus paid?||On completion of your home purchase||Monthly|
|What can it be used for?||The mortgage deposit||The home deposit and mortgage deposit|
|What’s the maximum property price?||£250,000 (or £450,000 in London)||£450,000|
|How soon can you use it?||Once you’ve saved over £1,600 (can be done in a minimum of three months)||After you’ve had the account for a year|
|Is there an investment option?||No, cash savings only||Yes: stocks and shares LISA|
|Can I withdraw money if I’m not buying a home?||Yes, but you don’t get the bonus||Yes, if you’re over 60. If you withdraw before then, you’ll pay a penalty|