Lifetime ISA Explained

Many people are unaware that formal pension isn’t the only way to save for their retirement. A Lifetime ISA is a good option. A Lifetime ISA (LISA) is a dual-purpose ISA, designed to help those saving for either their first home or retirement. It was launched by the government to help young people save flexibly for the long-term throughout their lives.

Who is eligible for the Lifetime ISA?

You’re eligible to open a LISA if you are aged between 18 and 39.

How does the Lifetime ISA work?

☑ You can save up to £4,000 each tax year, every year until your 50th birthday. There is no minimum or maximum monthly contribution but you cannot put in more than £4,000 per year.

☑ The government will pay an annual bonus of 25% (capped at £1,000 p.a.) on any contributions you make.

☑ Funds can be withdrawn tax-free at any time in order to buy a first home worth up to £450,000, and from age 60 for any purpose without a penalty.

☑ Over a lifetime, you could save a maximum of £128,000. This means you can receive a maximum of £32,000 in government bonus on top of the returns you get from the account itself. The longer you have one open for, the more significant that overall bonus from the government will be.

☑ You can only dedicate Lifetime ISA funds towards buying a home from 12 months after you’ve opened the account.

☑ Accounts are limited to one per person rather than one per home – so 2 first-time buyers can both receive a bonus when buying together.

☑ A big selling point of the Lifetime ISA is that the money is accessible should you really need it, though bear in mind that if you do make any withdrawals other than to use as a deposit on a house, there will be significant fees to take into account.

Will I earn tax-free interest on my LISA?

The ISA limit for the current financial 2019/20 is £20,000. Tax-free interest will be earned on all balances as long you have not exceeded the tax free allowance. You’re able to pay into one Lifetime ISA in each tax year, as well as a cash ISA, stocks and shares ISA, and an innovative finance ISA.

Withdrawing from a Lifetime ISA?

You can make withdrawals that aren’t for a first house purchase or retirement, but a 25% charge applies to the amount being withdrawn. This returns the bonus element of the fund to the government, with an additional charge. You will still have access to your savings and any interest earned on them, minus the charge. Please bear in mind that if you make a withdrawal before you receive your first bonus, the charge will still be made so you won’t be able to take out as much as you deposited.

What happens if I decide not to buy a house once I have opened a LISA?

You can carry on saving towards retirement, or withdraw the funds subject to the 25% withdrawal charge mentioned above.

What happens if my house purchase falls through after I’ve closed my LISA?

The original LISA can be re-opened, and the amount you’d saved will be returned to the original account.

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