Available since April 6th 2017, the Lifetime Individual Savings Account (also referred to as the Lifetime ISA, or LISA) was launched by the Government as a tax-free way for 18–40-year-olds to save money to help them with the purchase of their first home, or to fund their retirement. The Lifetime ISA offers a flexible way of saving for the long term, with the intention of helping people to save for both their first home and their retirement without having to choose between the two.
Savers can withdraw some, or all, of their money at any time to buy their first home. Alternatively, they can keep building on their savings until they reach 60, at which time they can withdraw it to help during their retirement. As with the regular Individual Savings Account (ISA), there is no Capital Gains Tax and no additional Income Tax on profits withdrawn. Lifetimes ISAs can hold stocks and shares or cash, or a combination of these.
HOW MUCH CAN YOU SAVE, AND WHAT DOES THE GOVERNMENT CONTRIBUTE?
Any person between the ages of 18-40 can invest up to £4,000 in each tax year and benefit from a Government bonus of 25%. Potentially, this means that savers can receive a Government contribution of up to £1,000 a year. Some, or all, of this money can be withdrawn to purchase a first home, or it can be kept until the owner of the Lifetime ISA reaches 60.
Lifetime ISA accounts can be opened between the ages of 18 and 40, but savings can still be added after this time and the additional 25% Government bonus will apply to all deposits made before a saver’s 50th birthday. You can’t pay into your Lifetime ISA after this age, but your account will stay open, and your savings will continue to earn interest until they are withdrawn. There is no maximum monthly contribution and you can save as little, or as much as you would like to, provided it doesn’t go over the £4,000 limit per year. If you have other ISAs you can still benefit, as the total amount you are permitted to save each year for the 2022 to 2023 tax year is £20,000. This allowance excludes contributions made into any Junior ISA though, as there is a distinct allowance that will apply for each child.
LIFETIME ISAS FOR A FIRST HOME
Once a Lifetime ISA has been opened, you must wait a minimum of 12 months, but any time after that you can withdraw your savings, along with your Government bonus, to put towards a deposit for your first home (homes must be in the UK and not exceed £450,000). If you decide to withdraw for another reason, or if your property is costing more than £450,000 you will still be able to make a withdrawal, but you will be faced with a 25% withdrawal penalty.
If you also have a Help to Buy ISA, you can only use the bonus from one of these ISAs to put towards your house deposit.
LIFESTIME ISAS FOR RETIREMENT
If you take out a Lifetime ISA to help you during your retirement, you can withdraw your savings without paying tax at any time following your 60th birthday. You don’t have to withdraw it all at once and any savings you leave in your account will continue to gain interest and growth.
You have the option of withdrawing before this, but in doing so you would forfeit the Government bonus, along with any interest it generated. You will also have to pay a 25% penalty.
As with any form of savings account, there are pros and cons that could vary depending on your individual circumstances. If you are interested in taking out a Lifetime ISA, or would like to discuss the options available to you for savings and investments in general, please get in touch.
This article does not constitute financial advice and should not be construed as such.