Lifetime ISA – How it works

If you’re saving for a deposit for your first home, it can be confusing trying to work out where best to keep your money. There is a tax-free ISA available where the government adds 25% to your savings, but like with most things, there are pros and cons

To help you understand how it works, we’ve summarised what you need to know below.

What is a Lifetime ISA?

  • Lifetime ISAs (LISAs) are for UK residents aged between 18 and 39 years buying their first home. You must use a conveyancer or solicitor to act for you in the purchase, and you must be buying with a residential mortgage.
  • You can save a maximum of £4,000 every tax year in your Lifetime ISA.
  • There is a government bonus of 25% on top of whatever you save. So, if you save £4,000 each year, you could earn an extra £1,000 every year until you are 50 years old.
  • The bonus is paid into your account monthly, and is added to your savings amount so will earn interest too.
  • Important: A Lifetime ISA must be open for one year before you can use it to purchase your first home. Alternatively, you can keep your cash in a Lifetime ISA until you retire.
  • You can buy a property anywhere in the UK up to £450,000.
  • It can be used at the same time as using other schemes such as Right to Buy, Shared Ownership, Self Builds and Help to Buy loans.
  • If you withdraw money that is not to purchase your first home or taken before you are 60 years old, the government charges a withdrawal fee of 25% on the total amount withdrawn. Note that this charge has been reduced to 20% until April 2021.

Is there anything else I need to know?

  • If you’re buying as a couple, you can each have your own Lifetime ISA (unless one of you has owned a property previously), which means you can double the bonus.
  • If you want to buy a property for more than £450,000, you will need to withdraw your savings and pay the 25% penalty.
  • Your savings will be available in time for exchange on your property so it can be used as part of your deposit.
  • If you use your ISA to buy your first home, you can choose to keep your account to save for your retirement.
  • The Lifetime ISA can be used to just save for retirement. You can access your savings once you turn 60 to help fund your retirement.
  • If you choose a Stocks & Shares Lifetime ISA, there may be risks associated with investing as the value of investments may go up or down. Alternatively, you can opt for a Cash Lifetime ISA instead.
  • You’re not locked into your Lifetime ISA provider and are free to transfer your funds to another provider at any time to try and get a better interest rate.

Can I have a Lifetime ISA AND a Help to Buy ISA?

If you already have a Help to Buy ISA, you can also have a Lifetime ISA, but you are only able to use one of them to buy your first home. The government bonus will not be granted on both.

To compare savings accounts, check out these best buys. If you are about anything then why not speak to one of our mortgage advisers.

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