The Lifetime ISA explained

If you’re aged under 40, you’re eligible to open a new Lifetime Individual Savings Account (LISA) to help you save for a home or your retirement. Here, we explain the LISA rules.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change in future. Their effects on you will depend on your individual circumstances.

What you’ll learn:

  • How the LISA works and how much you can save.
  • How much the government will give you in the form of a bonus.
  • When you can withdraw your money.

The Lifetime ISA (LISA) launched on 6 April 2017 and is designed to help younger generations get on the property ladder, or to save for their retirement – or even both. To be eligible to apply for an account, you must be aged over 18 but under 40.

Here, we look at how the LISA works and how it could help you achieve your savings goals. You need to bear in mind that these rules might change over time and that their effects on you will depend on your individual circumstances.

How much can you save?

You can save up to £4,000 a year into a LISA. This will be supplemented by a government bonus of 25% of the money you put in. After year one, the bonus will be paid into your account monthly based on how much you pay in, but in the first year it’ll be paid in one lump sum at the end of the tax year. The maximum bonus that you can get is £1,000 each year. You’ll get a bonus on any savings you make up until you reach 50 years of age at which point you won’t be able to make any more payments into your account. You only receive the bonus on the new money that you pay in (for transfer from another ISA) during the tax year, rather than it being based on the overall value of your LISA. So, if you saved the maximum £4,000 a year from the age of 18 until the age of 50, you’d receive a total bonus of £32,000 from the government. Remember, however, that tax rules can and do change and their effect on you will depend on your particular situation, which can also change.

What does the lifetime ISA mean for other ISAs?

You will be able to have any combination of different ISA types and a LISA at the same time. For example, if you have a cash ISA and an investment ISA already, you can also have a LISA. You can’t pay in more than the annual ISA allowance however, which in the 2018-19 tax year, is £20,000, with a maximum of £4,000 going into the Lifetime ISA. Remember, the ISA allowance is per person and not per household, so two first-time buyers can both receive a bonus when buying their first home together.

Find out more about our Investment ISA

If you already have a Help to Buy ISA, you’ll be able to transfer your balance into a LISA at any time if the amount doesn’t exceed £4,000. In the tax year 2018-19 only, you’ll be able to transfer the full balance of your Help to Buy ISA as it stood on 5 April 2018, into your Lifetime ISA without affecting the £4,000 limit. Alternatively, you could keep your Help to Buy ISA and open a LISA, although you’ll only be able to use the bonus from one of these accounts to buy your first home.

What can you invest in?

LISAs can hold cash, stocks and shares qualifying investments, or a combination of both. The option that’s right for you will depend on your approach to risk, your investment time-frame and how confident you are making your own investment decisions.

For example, if you’re saving for a house deposit, chances are your time horizon will be relatively short and you’ll need your savings within the next few years, so a cash LISA might appeal. As with other types of savings account, you’ll receive interest on the money you hold in your LISA.

However, if you’re using the LISA for retirement and have several decades to go before you’ll stop work, an investment LISA may appear a more attractive option.

The main appeal of investments is that they offer the potential for higher returns than those offered by savings accounts. However, with this potential comes greater risk, so you must be prepared for the fact that investment values can fall as well as rise, so there are no guarantees you’ll get a higher return, or even get back what you invested.

When can you withdraw your money?

You will be able to use funds held in a LISA after 12 months to buy a first home valued up to £450,000. You must be buying your home with a mortgage.

Alternatively, after your 60th birthday you’ll be able to take out all your savings from your LISA tax-free, for use in retirement. A LISA can be accessed like a normal ISA at any time for any reason, but if not used as above you’ll have to pay a withdrawal charge of 25% of the amount you withdraw (being the government bonus plus a penalty of 5%).1 However, this withdrawal charge won’t apply if you decide to cash in your account during the first 12 months after its launch.2

If you want to use your LISA to save for a property as well as for retirement, once you’ve bought a home, you’ll be able to continue saving into your LISA as you were previously. You’ll continue to receive the government bonus on your contributions until you reach the age of 50.

Bear in mind that the LISA is designed to boost your retirement savings, not to replace pensions, so if you can afford to, it may be worth considering making the most of both pensions and LISA allowances.

Remember that tax and ISA rules could change and that their effect on you depends on your individual circumstances, which can also change over time.

Please bear in mind that this article is for general information purposes only. If you’re unsure, seek professional financial advice. Barclays does not currently offer a LISA.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change in future. Their effects on you will depend on your individual circumstances.

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