Lifetime ISAs Explained

Jane Wardle

Written by Jane Wardle on March 20, 2019

Updated May 3, 2019


Saving for your first home or for your retirement can seem like an overwhelming prospect, and for many young people having a decent amount of savings can seem like an unachievable goal. Whether it is owning a home of your own, or having a reasonable savings pot for your retirement, it isn’t always easy to get the money together to secure yourself a comfortable future.

The government is aware of these struggles to younger generations and are working on plans to make it easier for those under the age of 40 to save their hard earned cash for a better future. One of the most popular recent government initiatives is the introduction of the Lifetime ISA or Lifetime Individual Savings Account.

This guide covers everything you need to know about Lifetime ISAs, including what they are, who they are for, and how much you can invest.

What is a Lifetime ISA?

Lifetime ISAs are a brand new type of ISA that was created by the government specifically to help people save for their first home or for their retirement. The scheme was introduced in April 2017 and is a tax-efficient method of savings designed to help young people take their first steps on the property ladder or secure a comfortable retirement.

When you open a Lifetime ISA, the government will give you a bonus worth 25% of everything you pay in. Essentially, the government will pay in £1 for every £4 you save. This is capped so that the most you can save is £4,000 in one tax year, so the maximum the government will add is £1,000 a year. This bonus is added to your Lifetime ISA account every tax year, which means you will continue to earn interest on it after that.

The government will only continue to make these bonus contributions until you reach the age of 50, and you can use the money at any time to buy your first home. If you are not using it to buy your first home, you will not be able to access it until you reach 60 years old.

After you reach the age of 60, you will be able to use the money from your Lifetime ISA to spend however you please. If you want to access the money before this age, then you can only use it towards purchasing your first home.

Who can get a Lifetime ISA?

To be approved for a Lifetime ISA, you must be between the age of 18 and 40 on the date that you open the account, and also a resident in the UK. If you already have another form of ISA such as a standard ISA or a help to buy ISA, then you can open a Lifetime ISA alongside these, and they will all contribute towards your total ISA allowance which is currently £20,000.

If you already own a property, then you can still open a Lifetime ISA to save for your retirement. However, you will not be able to use the money to purchase a property and will only be able to access the savings once you reach the age of 60.

It is possible to withdraw your money from a Lifetime ISA before you are 60 for something other than buying your first property, however, you will be charged a 25% penalty for withdrawing the money. Essentially removing the bonus added by the government.

How much can I invest in a Lifetime ISA?

Like with all ISAs, the money you invest is completely tax-free. You can have a Lifetime ISA alongside a regular cash ISA and a stocks and shares ISA, you will just need to ensure that your annual contributions stay within the limit of £20,000.

In a Lifetime ISA, the maximum you can save to receive government contributions is £4000 every tax year. This means if you saved £4000 a year from the age of 18, up until the age of 50 when you can no longer pay into a Lifetime ISA, you would save £128,000 and receive £32,000 in government bonuses — giving your ISA the total value of £160,000 plus any interest earnt.

The government bonus for your ISA is based on the contributions that you pay into the account, and not the overall amount that is saved. This means that it doesn’t matter what interest rate you have on your account, or how well your stocks and shares perform; you will still receive the same 25% bonus from the government.

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