What is a Lifetime ISA?
In April 2017 a new scheme was set up to help people better plan and save for the future. The free money can be put towards the purchase of your first property and your retirement.
Similar to a Help To Buy ISA; less flexibility but with more free money up for grabs…
Here is a breakdown on everything you need to know about Lifetime ISA’s (LISA).
Difference between normal cash ISA and LISA?
ISA stands for Individual Savings Account. You can deposit money into the account and use it for absolutely whatever you fancy. To help save for a car, or a holiday, or travelling etc.
An ISA offers tax-free interest so there is a limit of £20,000 that can be deposited into the account each tax year.
A Lifetime Individual Savings Account (LISA) is backed by the government and is dedicated to long term saving goals – either buying your first home or for your retirement.
Much like a Help to Buy ISA (you can read here all about what a Help to Buy ISA is), the government top the account up with free money! CHA-CHING
The requirements to opening an account:
- You are between the ages of 18 to 39
- You are a UK resident
The benefit of opening this account is that the government will add a 25% bonus on top of your savings that can go towards your first house or your retirement.
How much can I deposit into the account?
The maximum amount you can deposit into your account is £4,000 per tax year.
This can be paid in one lump sum or made as multiple payments over the course of the 12 months.
How much will the government pay out?
The maximum bonus paid out per year is £1,000.
If you set up the account at 18 in preparation for retirement and pay in the maximum the annual allowance of £4,000 every year up to the age of 50, you could receive up to £33,000 of free money if you withdrew the money at the age of 60.
How do I get the bonus (free money)?
The bonus is automatically added to your account on a monthly basis.
This is a big bonus because you then earn interest on both your deposited money and the free money! Double whammy.
Your bonus is calculated on any payments made into the account from the 6th of the month to the 5th of the following month. The 25% bonus is paid directly into the account (you receive the payment within 14 days after the 20th of month 2).
e.g. On 6th January (month 1), you deposit £1,000 into your account.
On 5th February (month 2), they calculate how much you have paid in and work out what the 25% bonus will be (25% of £1,000 is £250).
This £250 will be paid into the account 14 days after February (month 2).
What can the money be used for?
You can use the money for a deposit to help buy your first property up to the value of £450,000.
Alternatively, you can use the money for your retirement to be accessed once you are 60 years old.
Something to bear in mind – If your first house purchase didn’t meet the minimum requirements (e.g. value of over £450,000 or you end up buying a house with someone who already has a house) then you would need to leave the money in the LISA until you are 60. If not, you would be subject to a penalty withdrawal fee on the total amount and lose 6% of your money! [explained below]
Can I withdraw my money from this account?
One downside to a LISA is that it is not as easy to withdraw money from this account.
If you decide to withdraw money from your LISA (and are not using it for the purchase of your first house or for your retirement), then there is a penalty fee of 25% on the total withdrawal amount.
This means you end up losing approx. 6.5% of your money.
e.g. If you paid £1,000 into your account, the government would add a bonus of 25% (£250) and the account would show a total balance of £1,250.
If you withdrew the full £1,250, the penalty fee of 25% is applied and you would lose £312.50.
This means you would end up with £937.50.
Not only do you lose the £250 bonus you were awarded, but you end up with less than you started out with!
Reasons why you should open an account:
- It is free to open so no harm in doing so.
- It does not need to be used against a house purchase; it can be for future planning around your retirement which is just as important (even though it might seem like a long way away!)
- You get paid the money on a month by month basis so are making interest on everything in the account.
- You can earn £1,000’s in free money and can be used towards the deposit of a house!
- If you change your mind and do not end up using the money for your first home, you either must leave the money in there until you turn 60 or you face a penalty fee.
- The account must be open for one whole year before you can use it against your first property purchase.