It’s been five years since the government launched a new savings account to help first-time buyers and those saving for retirement – but are you making the most out of it?
The Lifetime Isa (Lisa) launched in 2017 as a replacement to the Help to Buy Isa. It eventually took its place, offering anyone aged 18-39 the chance to save each year – and get a boost from the Treasury.
The cash can go towards your first home or your own private pension savings – and the money is paid out every year.
You qualify if you're saving for a deposit or have already bought a home but are saving for retirement.
“Over half a million people have opened a Lisa since they were introduced almost five years ago, and our stats alone show more than 5,000 have used them to realise their dream of home ownership,” explains Helen Morrissey, pensions and retirement analyst at Hargreaves Lansdown.
“While current holders are too young to be using them to draw a retirement income, they will prove a useful tool in future. The average age of our Lisa holders is 31 years old, and given that this is the same as the average age of a first-time buyer, it would seem to show that a fair number have opened a Lisa for retirement.”
A Lisa is particularly useful for self-employed people, who are not currently covered by auto-enrolment and so are less likely to have a pension.
But as with most schemes, there are clauses to be aware of, such as the 25% penalty that applies when you use the money for something else.
“While the 25% government bonus is generous, the 25% penalty for withdrawing money from a Lisa means the holder loses not only their bonus but a chunk of their savings too.”
“In addition, the £450,000 limit on the home that can be purchased with a Lisa is looking incredibly squeezed for people living in London and they face penalties that again will take a chunk out of their hard-earned savings.”
Thinking of opening a Lifetime Isa? Here’s everything you need to know.
Who can open a Lifetime Isa account?
Anyone aged 18 to 39 who is saving for their first home or retirement. If you already own a home you can use it to start savings for your pension instead.
How much can I put in a Lisa and how much will I get?
The financial year begins on April 6 each year, and ends the following April.
Each tax year, you have an overall Isa allowance. This year it’s £20,000, and you can divide it between a Cash Isa, Stocks and Shares Isa, Innovative Finance Isa, Lifetime Isa, and Help to Buy Isa.
Within the overall allowance, you can put up to £4,000 a year into a Lisa, or £200 a month into a Help to Buy Isa.
The government will then top this up with a 25% bonus up to £1,000.
Can I open a Help to Buy Isa and a Lifetime Isa and get two bonuses?
No. You can put money into both a Lisa and a Help to Buy Isa, but it’s not recommended, because you can only get a bonus for a house purchase on one or the other.
How old do I have to be to open one?
Anyone aged 18 to 39 can open a Lisa account.
You can continue to pay money into the account until the day before your 50th birthday.
After this date, you'll continue to get interest or and returns on your investment but the bonus payments will stop.
Do I have to pay tax on any money I make from it?
No. The government contribution is tax-free and as with all Isa accounts, you can pay in up to £20,000 a year tax-free.
So if you put £4,000 in the LISA this tax year, you'll get a 25% state bonus and you'll be able to put £16,000 into other ISAs.
Does the bonus count towards my Isa allowance?
No. The bonus you get doesn't count towards the year's ISA allowance.
Will I get interest on top of any bonus payments?
This depends on what type of Lisa you’re opening.
There are two types, Cash Lisas (generally recommended for house-buyers) and Investment Lisas ( usually recommended for retirement savers as you have longer to accrue returns ).
On the cash version, interest is paid tax-free on the amount you pay in and any bonuses.
On the investment option, you can earn returns in the form of dividends, capital gains and bond interest. With a Stocks and Shares Lisa you won’t pay tax on any of them.
What happens if I choose to use the cash for something else?
These accounts are reserved for first-time buyers and retirement savers only which means a penalty will apply if you withdraw the cash for any other use.
That’s at a rate of 25% of the amount withdrawn, so it's best to try to only use the Lisa for its two primary purposes.
Have you been denied your Lisa bonus? Let us know: emma.munbodh@mirror.co.uk
What happens if the account holder passes away?
You don't pay the withdrawal charge if you die or are terminally ill.
The rules state that if you have less than 12 months to live, you can keep the bonus with no penalties.
If you die, any money including interest and bonuses is passed on to your beneficiaries without penalty, however it could be subject to inheritance tax.
How will the money go towards my house purchase?
You will need to have the account open for a year before you can use the cash to buy a house.
But when you’re ready, don’t fall into the trap of withdrawing the money yourself as this could result in a withdrawal penalty.
You’ll need to ask your account provider to transfer the cash directly to your conveyancer, not to you, within 90 days of completion.
All your savings, including the bonus, will be available to use at exchange. If the sale collapses, the money can be paid back into the Lisa account.
Should I switch from a Help to Buy Isa to a Lisa?
This depends on how close you are to buying your house.
Both accounts pay a 25% bonus that's added to what you save, but some of the terms are different.
With a Help to Buy Isa, you can only pay in £2,400 a year, however with a Lisa, this is £4,000.
You can also pay the cash in a Lisa in a lump sum – whereas Help to Buys can only be paid into monthly.
On Lisas, the bonus is paid monthly, on Help to Buy, the cash is only paid when your solicitor requests it.
Help to Buy is also limited to homes selling for £250,000 across the UK or £450,000 in London, With Lisas, there’s a UK-wide limit of £450,000.
Lastly, you can use your Help to Buy Isa once you have paid in £1,600 but to use a Lisa it must have been open for a year.
I’m buying with someone else – can we both get the bonus?
If you're both first-time buyers buying a property together you can both open one and save in it, essentially doubling the bonus.
If you're a first-time buyer making a purchase with someone who's owned before, you can still open one and use it towards a home purchase together, but your partner won’t be able to have one too.
How much does the property need to cost?
To claim a Lisa bonus, you'll need to buy a property that costs £450,000 or less. This can be anywhere in the UK.
You can use the Lifetime ISA with other Government schemes including Help to Buy – but bear in mind that Help to Buy is limited to new-builds only. This doesn’t affect your Lisa.
However, crucially, you need to have the LISA open for a year or more to be able to use it for a home.
