How to Use Your Lifetime ISA Allowance
Every UK resident over the age of 18 has a yearly Lifetime ISA allowance which they can pop into a LISA to gain very attractive returns and gains year-on-year. But what is the allowance, and what's the best way to make the most of yours?
What is a LISA?
A Lifetime ISA (LISA) is a type of ISA which is designed specifically for long-term savings.
These are a tax-efficient wrapper where you can put your money to gain interest or returns, and also a 25% bonus from the government. For this (very attractive) ISA, there are strict regulations, including…
- You can only put in £4000 per year
- You can only pay into one LISA each year
- You can only hold two LISAs in one lifetime
- You can only withdraw your funds for two specific reasons (outlined below)
- The earliest you can take money out of your ISA is one year after opening the account
This is because these are designed for long-term life long saving – as the name would suggest.
How can I use it?
You can use your LISA for two purposes:
- To pay for a deposit for your first home
- To fund retirement
If you take your money out for any other reason, then you will loose the 25% bonus as well as potentially being subject to extra penalty charges, depending on your account and provider.
How can I maximise my allowance?
The main way to maximise your LISA allowance is by putting as much as possible of your spare cash into the account each year as possible.
With an ISA, the amount you make is dependent on what you put in.
If the LISA limit is £4000, and you get a 25% bonus than you could stand to get a cash injection of £1000, which is a return rate which you will struggle to find elsewhere.
So, for example…
If you open a LISA at 18, and put in £4000, you’ll receive the 25% bonus. This would leave you with £5000 in the bank.
If you continue to save that rate, year on year, then by the time you reach retirement you would have saved £132,000 of your own money – and received a very healthy bonus of £33,000 in total bonuses.
This is assuming you only have one LISA and so not use it to help fund you first home, however even if you do this, you would still have a fairly healthy return and the majority of house deposits for first-time buyers sit at a 5-10% of the total value. Considering the average house is £230,000 approximately, then you’ll only have to knock off £23,000 off the total potential saving.
Also – if you are part of a couple, then you are able to put two LISAs towards a house deposit – meaning you can get double the benefit and get double the boost. This is of course assuming you are buying the property under a joint mortgage.
When can I access my Lifetime ISA allowance?
There are only a few instances when you can access your LISA funds. These are:
- When buying your first home
- When you reach the age of 60
There are some exceptions to this, for example if you have been diagnosed with a terminal illness then of course you will be able to access your funds when you require them.