What is a lifetime ISA

POSTED ON Wednesday, 23 December, 2020

The lifetime was launched in 2017 as a savings vehicle that younger people can use either to provide for buying a first time home, or to save for their retirement.

What is a lifetime ISA?

The lifetime ISA was launched in 2017 as a savings vehicle that younger people can use either to provide funds for buying a first time home, or to save for their retirement.

If you start saving for retirement early in your working life, then the value of your final pension pot can be significantly higher. However, for many younger people, it is very difficult to save for retirement as their priority is often to get on the housing ladder.

The lifetime ISA is a tax free savings account designed to assist in this respect, as it allows people to make contributions, then at a later stage they can decide whether to use the funds for property purchase or for retirement savings.

How does it differ from other ISAs?

The differences between lifetime ISAs and other ISAs include:

The standard ISA allowance is £20,000, but you can only contribute £4,000 per tax year to a lifetime ISA. (You can still contribute up to £16,000 to other forms of ISA if you use your full lifetime ISA allowance)

Other forms of ISA are open to all UK adults, but you need to be aged between 18 and 39 to open a lifetime ISA, and you can only make contributions until age 50

The Government will contribute an extra 25% to your lifetime ISA on your behalf, so if you contribute £4,000, you will receive an extra £1,000. In this respect, it is similar to the tax relief provided on personal pension contributions

You normally have the right to withdraw the funds from other types of ISA, but you should only withdraw your lifetime ISA funds if:

  1. You are aged 60 or over – and are therefore accessing them for your retirement
  2. You are purchasing your first home
  3. You are terminally ill with less than 12 months to live

Withdrawals for any other reason will result in significant charges being levied – you will lose 20% of your investment, rising to 25% from April 6 2021

Where can I invest via a lifetime ISA?

You can invest your lifetime ISA contributions in cash,  stocks & shares or a combination of both. Not all ISA providers offer a lifetime ISA so it is worth using a specialist site like this one to see what is available. You can use our ISA calculator to get an idea of what growth you might enjoy based on an assumed rate of growth.

What conditions apply to house purchases via a lifetime ISA?

If you use your lifetime ISA savings to purchase a home, then all of the following requirements must be satisfied:

  1. It must be your first property purchase
  2. You must be planning to live in the property
  3. The property must cost £450,000 or less
  4. You must wait at least 12 months after opening the lifetime ISA before purchasing
  5. You must purchase the property using a mortgage
  6. You must engage a solicitor or conveyancer to act on your behalf during the buying process

What if I’ve already got a Help To Buy ISA?

A  Help To Buy ISA was a previous Government initiative to assist people to get on the housing ladder. You can no longer open a new Help To Buy ISA.

If you have both a Lifetime ISA and a Help To Buy ISA, you can only use the government bonus from one of these towards the purchase of a home.

You can transfer your Help To Buy ISA to a Lifetime ISA.

Example of a lifetime ISA

This example assumes no growth on your money. So for an initial contribution by you of £800, the government will add an extra £200 (25%) bonus to take your lifetime ISA pot up to £1,000.

If you were to withdraw money for reasons other than buying a home or for retirement then then the government bonus will need to be paid back.

How do I use a lifetime ISA to buy my first home?

So the property you are buying will need to not be valued at more than £450,000. The property purchase needs to be at least 12 months after you opened your lifetime ISA account.

Your  lifetime ISA provider will pay the funds in your account to your solicitor dealing with the property transaction. You need to be buying the property using a mortgage.

See below for a selection of lifetime ISA providers: