The Lifetime ISA (LISA) 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. Bear in mind that these tax 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, with a government bonus of 25% on top of the money you put in. 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.
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.
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 2021-22 tax year is £20,000, with a maximum of £4,000 going into the Lifetime ISA.
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.
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.
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%). However, this withdrawal charge won’t apply if you decide to cash in your account during the first 12 months after its launch.
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.