The Lifetime ISA Explainedfeatured

In the 2016 Budget, Chancellor George Osborne announced the introduction of a new ‘Lifetime ISA’. Designed to help people save for a home of their own and save for retirement, the new ISA will reward savers with an extra £1 for every £4 they save. In this post I’ll explain the Lifetime ISA in greater detail and look at how it could help you save for the future.

Please note that since the Lifetime ISA was only introduced earlier today, I don’t have all the info just yet. I’ll aim to keep this post updated whenever I hear anything new about the Lifetime ISA.

Who’s entitled to a Lifetime ISA?

From April 2017, anyone aged 18-40 will be able to open a new Lifetime ISA and save up to £4,000 in this ISA each year. Their savings will benefit from a 25% boost from the government, so those who put deposit the full £4,000 in a year will benefit from an extra £1,000.

First-time buyers can use the money to buy a home, and anyone can use the money to save for retirement.

Can I get a Lifetime ISA if I’m over 40?

Unfortunately, those who reach 40 before the 6th April 2017 will not be able to save in the Lifetime ISA. Seeing at this new ISA won’t come into play until April next year, those that turn 40 shortly after the 6th will have to be really quick to open an account before they become ineligible.

If you’re ineligible for the Lifetime ISA and you would have liked to use it to buy your first home, you may be entitled to a Help to Buy ISA.

How much can I get from the government in the Lifetime ISA?

Although everyone will receive £1 for every £4 they place in the account themselves, the total amount you’ll get from the government will depend how young you are when you start saving, whether you place the full amount in your account as often as possible, and when you decide to stop saving.

Money Saving Expert says: “If you’re currently 17, and you open a Lifetime ISA on your 18th birthday (they’re only available from April 2017), you’ll be able to get a maximum £32,000 government bonus by the time you’re 50, assuming you save the maximum £4,000 per year, and future governments don’t change the rules.”

Obviously this would be pretty difficult for the average 18-year-old to achieve in the early stages of their career, but ‘financially comfortable’ parents with teenage children may see this as an opportunity to help their offspring prepare for retirement.

When will I receive the bonus?

You’ll receive your bonus at the end of each year. This means you’ll not only benefit from interest on your own contributions but also the government’s contributions too. By opening your account early, you’ll give compound interest the opportunity to snowball. If you choose to use the money as a pension, by the time you come to retire, your savings will have grown substantially.

When can I withdraw the money?

If you’re using the money to buy your first home, you can take the money out at any point providing you’ve been saving into the account for at least a year. So if you’re planning on buying a home before April 2018, you’ll need to save in a Help to Buy ISA instead.

If you’re using the Lifetime ISA to fund retirement, you can withdraw the money once you turn 60.

You are able to withdraw the money sooner if you wish, but the government bonus will be withdrawn and you’ll face a 5% penalty. If you needed to withdraw a percentage of the money, whether that’s to cover the cost of an emergency expense or to buy a car, you’d lose the perks associated with the amount taken. Any money left in would continue to reap the benefits.

Are there any limits on the type of home I can buy?

You can use money saved in the Lifetime ISA to buy a qualifying property up to the value of £450,000. At this stage, this seems like a better deal than the Help to Buy ISA which only lets first time buyers outside of London purchase properties up to £250,000.

Can I pay into other ISAs at the same time as the Lifetime ISA?

Yes. Providing you don’t place more than £20,000 in your ISAs collectively.

If you already have money in a Cash ISA, investment ISA, or Help to Buy ISA, you can transfer funds over into the Lifetime ISA if you wish. But remember that you can, technically, only deposit £4,000 into the Lifetime ISA annually. So you’ll have to keep any remaining funds where they are or move them into another account.

There is an exception to this rule. If you placed money into an ISA in a previous tax year, this money can be transferred into your Lifetime ISA without affecting your annual allowance. When the time comes, discuss this with the bank or building society and ask them to transfer the money for you. You cannot simply withdraw the money yourself and deposit it into your new Lifetime ISA.

Is the Lifetime ISA better than the Help to Buy ISA?

Both the Help to Buy ISA and the Lifetime ISA give you £1 for every £4 you save.

Both ISAs also allow you to accrue interest on the money you save yourself, though the amount of interest you receive will depend on the ISA provider you select.

However, the Lifetime ISA does have some perks.

You can save more in the Lifetime ISA

First of all, after placing an initial (and optional) deposit of £1,200 into a Help to Buy ISA when you first open one, the most you can save is £200 a month. You won’t be able to save more than £12,000 in this account in total. As a result, you won’t receive more than £3,000 from the government in total.

The Lifetime ISA, however, could see people receiving up to £32,000 from the government if they start saving early enough.

You can accrue more interest over time in the Lifetime ISA.

Since the government’s contribution will be placed in the account annually, you’ll be able to accrue interest on this money too. If you opt for the Help to Buy ISA, you won’t receive the money until you’re ready to buy a property, so you won’t earn any interest on the government’s input.

You can purchase a more expensive home with the Lifetime ISA.

Help to Buy: Property limit is £450,000 in London and £250,000 in the rest of the UK.

Lifetime ISA: £450,000 property limit everywhere.

If I open a Lifetime ISA, will I still be able to save into a pension scheme?

Yes. There’s no reason why you can’t save money in both the Lifetime ISA and a pension scheme at the same time if you can afford to. So if you’re a fan of diversifying your savings, this could be a good option for you.