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Complete Guide to Lifetime ISAs: Everything You Need to Know

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What Are Lifetime ISAs?

A Lifetime ISA (also known as LISA) is a relatively new development. These personal savings accounts are designed to help to save money towards your first home or for your retirement. You are allowed to contribute up to £4000 annually and the government will “top up” the account with 25% extra to help you towards these goals.

Anyone from 18 to 39 years old can open Lifetime ISAs, and bonuses are paid annually until you turn 50.

These new types of ISA are a huge bonus for people living in the UK, as you get the government-issued top up amount, plus any growth of your money within the ISA is completely tax-free.

Imagine any other investment vehicle where you are automatically guaranteed 25% growth on top of any other increase, plus it’s all tax free!

How do you decide if Lifetime ISA is right for you? This guide explores aspects to consider before you decide. These include investment limits, rules for using Lifetime ISAs for home purchase and retirement, and more.

How Does a Lifetime ISA Function?

A Lifetime ISA has a maximum annual investment threshold of £4,000. You can put away as much as you want up to that amount every year. The government will add an additional 25 per cent of whatever you put away. This is paid into your savings account monthly.

If you hit that maximum limit and invest £4,000, for example, you will receive a bonus of £1,000 for that tax year. That is a lot of money for doing something as simple as saving. Altogether, you will have £5,000 in total for that year.

Moreover, if you plan to use the money from your Lifetime ISA to buy a house, there are other considerations. You may have a spouse or partner whose name will also be on that property purchase. Even though you will be buying together, you still have the option to open separate Lifetime ISAs.

That means each of you will benefit from the 25 per cent bonus every tax year. It is a simple investment to make with a lot of payoff.

Lifetime ISAs do not exclude you from opening other types of ISAs in a given year. You may open a Lifetime ISA in addition to other accounts like a cash or innovative finance ISA. This is important, because it allows you to build different kinds of savings simultaneously.

Other Types of ISA

However, the amount that you invest does figure in to your yearly ISA allowance. For example, for a year with a £20,000 allowance, investing £1,000 will leave you £19,000. You can invest this amount into whatever other ISA options you wish. This might be a cash ISA, a stocks and shares ISA, or an innovative finance ISA. You can also transfer the total amounts of these accounts if you want to get a better interest rate.

Is a Lifetime ISA the Right Choice for Me?

Not everyone is eligible for a Lifetime ISA and not everyone needs one. There are certain requirements you will have to meet in order to be able to take one out.

You must be at least 18 years old to open a Lifetime ISA. However, you may not be over the age of 40. Therefore, if you are approaching the cut-off, make sure to open one as soon as possible. You must also be either a resident of the U.K. or a Crown servant. This includes persons in the armed forces who are serving deployments in foreign countries.

If you already have a Lifetime ISA, you may continue to add funds until the age of 50. Help to Buy ISAs have no age cap, so you are free to open them whenever you like. Additionally, the minimum age for Help to Buy ISAs is 16. That means they can be a great first step in helping young people start saving.

ISA Providers

Buying Your First Home with a Lifetime ISA

There are several restrictions you need to keep in mind when using a Lifetime ISA to buy your first home.

  1. Lifetime ISAs can only be used by first-time homebuyers. Anyone who owned a home, even outside the UK, is ineligible. This is true even if you inherited the home or only owned a share in a domestic property.
  2. The home must cost less than £450,000.
  3. You must plan to live in the home you purchase. It cannot be a rental or holiday home, so you cannot use Lifetime ISAs for buy to let mortgages.
  4. You must use a traditional mortgage.

It is possible to combine yours and your partner’s Lifetime ISAs to purchase property together. Both of you must meet the eligibility criteria. If one of you already owns a home, that person will not be able to use their ISA. Combining your Lifetime ISAs can be a powerful way to extend the reach of your money.

Mortgage Guide for First Time Buyers

Read: Mortgage Guide for First Time Buyers

Additional Restrictions

You cannot use a Help to Buy ISA to buy homes worth more than £250,000 outside London or £450,000 within London. This is distinct from Lifetime ISAs, which can be used to purchase homes up to £450,000 regardless of your location. However, the benefit of Help to Buy ISAs is that they can be opened at 16 and there is no maximum age cap. This gives more flexibility to those who may currently be ineligible for a Lifetime ISA.

To get the bonus, you must be purchasing property with a residential mortgage. Buy to let does not apply and such arrangements are ineligible under Lifetime ISAs. However, shared ownership, help to buy loans, self-builds, and right to buy are all applicable. Lifetime ISAs are designed to help you buy a first home, not a rental property.

Lifetime ISAs are also applicable for down payments. You can use your money for the exchange deposit on the property you are buying. It can also be used for the deposit for the mortgage company upon completion of the process.

However, Lifetime ISAs are only applicable for properties in the U.K. Unfortunately, if you bought a home anywhere in the world, you are ineligible for the first-time homebuyer bonus. This applies even if you owned shares in a property or inherited it, even if you never lived there. It even applies if you owned a company or trust that possessed residential property that you could have lived in, regardless of whether you actually did. You can still use a Lifetime ISA for retirement savings, however.

Lifetime ISAs and Retirement

Even if you have a Lifetime ISA, be sure to pay into your pension, especially if your employer matches your contributions. Combining Lifetime ISAs with a pension can set you up for a more comfortable retirement. You are able to make partial or even full withdrawals from an ISA once you turn 60 without any fees. You also will not pay any tax on your withdrawals.

In addition, you can access your ISA balance if you are diagnosed with a terminal illness. If you are using your ISA to purchase your first home, your account must be at least a year old. Remember that you will lose the 25 per cent bonus if you close the account during the cooling off period. Keeping these facts in mind will help you use your savings most effectively.

Personal Pension Guide

Read: Personal Pension Guide

How Contributions to Lifetime ISAs Affect Other ISAs

You are allowed a maximum contribution of £20,000 annually to ISAs. If you contribute the maximum £4,000 to a Lifetime ISA, this will subtract from that maximum amount available to put in other accounts. Your 25 per cent bonus, however, does not count toward your maximum ISA allowance. This means that saving the maximum £4,000 actually gains you £5,000 total when considering the bonus.

Additionally, interest is paid tax-free on your contributions and so are state bonuses in the account when interest is paid. This helps you build compound interest over time. The interest also does not count toward personal savings allowance. That means you can still earn £1,000 annually in tax-free interest from other savings.

Withdrawing from Your Lifetime ISA

If you withdraw money from your ISA for any reason, you must pay a withdrawal fee. That excludes withdrawals due to retirement, terminal illness, or buying your first home. The fee is 25 per cent of whatever you withdraw. This is why you must be judicious in deciding to use your ISA for any reason other than those mentioned above. If you do not pay attention to the penalties for early withdrawal, you end up losing some of your contributions.

The 25 per cent is not limited to bonuses but includes your contributions. This is because you lose 6.25 per cent of your contributions.

If you die or are diagnosed with a terminal illness, there is no withdrawal fee. Lifetime ISAs allow those with less than a year to live to make a withdrawal penalty-free and retain their bonuses. This is also true if the ISA is left to beneficiaries. The account will no longer be in an ISA wrapper, instead becoming part of your estate subject to inheritance tax.

Lifetime ISAs and Bonuses

Bonuses are paid every year until you turn 50. If you contribute in a given month, the bonus is paid monthly. It will arrive in the account anywhere from four to nine weeks. Bonuses count as money in the principal balance. That means you receive interest on it just like your own contributions (as well as other interest or dividends). However, you do not receive bonuses for interest or gains on stocks and shares. The maximum bonus available for most people is £33,000 if you open the account at 18 and make maximum contributions until you turn 50.

Cash ISAs, Stocks and Shares ISAs, Finance ISAs, and Lifetime ISAs

The maximum contribution limit for ISAs is £20,000 this year (with a maximum £4,000 for a Lifetime ISA). Therefore, you are able to contribute to multiple ISAs. You may open stocks and shares ISAs, cash ISAs, or other finance ISAs, all in the same tax year. You can also open a Help to Buy ISA. If you have both a Lifetime ISA and a Help to Buy ISA, you can only use the first-time homebuyer bonus on one. One smart move is to use Help to Buy ISA for your first home and Lifetime ISA for your retirement.

If your provider allows it, you may transfer cash from any other ISA you already have. However, you can only transfer £4,000 total from other ISAs into the Lifetime ISA in a given tax year. Transfers do not affect your overall current tax year contributions. This means that a transfer of £4,000 from a previous year’s ISA will not affect your ability to deposit a maximum of £20,000 into stocks and shares ISAs, innovative finance ISAs, or cash ISAs. You will, however, use up your Lifetime ISA allowance for that tax year.

How Lifetime ISAs Work if Their Holder Dies

If you die before you use your ISA, the balance, interest, and bonuses, are passed on to your beneficiaries. They will face no penalty. Your ISA will become part of the estate and treated under rules for inheritance tax.

When you die, your spouse or civil partner receives a one-off increase in their own ISA allowance. That will be equal to what you had in your combined ISAs. This is true whether or not they are the beneficiary of your Lifetime ISA. If you are not married or in a civil partnership, the allowance does not pass to anyone.

Lifetime ISAs after the Age of 50

After you turn 50, you will still have your Lifetime ISA. You will no longer be able to contribute. However, you will still receive interest or dividends from the amount you saved before your 50th birthday. You can also transfer the account balance to another provider to improve your rates.

If the money is not used to purchase your first home, you must wait until your 60th birthday to withdraw for retirement income.

The exception is that you may make withdrawals if you forfeit all bonus payments and pay a fee. There are usually fees if you withdraw from a Lifetime ISA before 60 (or if you are not buying your first home). Therefore, it is best to use it for its intended purposes.

SIPP Guide

Read: Guide to SIPPs

What about Investment Lifetime ISAs?

Investment Lifetime ISAs have three basic types: capital gains, dividends, and bond interest. Outside of a Lifetime ISA, this income may be taxable. However, in a stocks and shares Lifetime ISA, they are tax-free. With careful planning, you can use this to further the growth of your accounts.

Opening a Lifetime ISA for Your Children

Because ISAs are individual products, your children will need to open their own account once they turn 18. You are free to give them money to start one. In the case of a Help to Buy ISA, the minimum age is 16. Therefore, these can be a good starting point for parents looking to help their children save. Because gifts are tax-free, you can give money to your children. The exception to this rule is if you were to die within seven years of giving. That means that the gift could be considered inheritance and taxed accordingly.

Other Considerations to Keep in Mind

Just like other ISAs, Lifetime ISAs have fluctuating interest rates. Interest rates will go up or down based on various circumstances. So, be sure to watch them in case you want to transfer to a new provider for a better rate. In the case of stocks and shares ISAs, you may want to alter your investment approach or move your account.

You may change providers if you wish. It may be beneficial to do so at some point, because of a better interest rate or other reason. This is permitted at any time, though individual providers may have regulations or stipulation regarding changes.

You may also have more than one Lifetime ISA if you wish. However, you can only pay into one Lifetime ISA each tax year. You can transfer the entire balance between accounts, too. With these stipulations, it is up to you to decide if it is worth it to have multiple Lifetime ISAs.

You may be concerned about means and capital test risk. Lifetime ISA balances are treated like any other ISA balance. So, means-tested benefits can be affected since Lifetime ISAs are treated like savings accounts. ISAs are also considered assets liable to debt recovery efforts. Keep that in mind should you find yourself in financial trouble.

Parliament can change the rules for Lifetime ISAs any time, but it is unlikely you should worry about losing bonuses. It is possible that a future government may decide not to pay any more bonuses. Withdrawal penalties and maximum contributions may also change, as well as general bonus policies. However, the system is built to give you confidence in your savings, so you can feel secure in contributing.

Where to Go to Learn More

Going it alone with your financial future is never wise. Be sure to talk to a financial adviser before making any major decisions about savings, investments, or retirement.

A qualified adviser can help you decide whether a Lifetime ISA is the right choice for you. That will be based on your goals, age, and other important factors. Additionally, an adviser can point you in the direction of better interest rates and advise you as you build your accounts. Navigating the ins and outs of saving for your future can be complex.

However, with the right tools at your disposal it does not have to be difficult. If you have not already begun to plan your financial future, make sure to begin as soon as possible. With any investment of this magnitude, you must not wait longer than necessary before you begin to build your savings.

Many residents in the United Kingdom find that a Lifetime ISA is a great investment for them. Begin investing now, putting away money (plus the yearly 25 per cent bonuses). That will help you get well on your way to buying a home or building for retirement.


Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business.His writing has been quoted by Nasdaq, Dow Jones, Investopedia, The New Yorker, Forbes, Techcrunch & More.He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased

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