Please note this article is for general educational purposes. Please check your product terms and conditions from your individual provider.
A Lifetime ISA is designed to help you save towards buying your first home, or towards your later life (including retirement) . It allows you to save up to £4,000 each tax year, and the key feature that makes a Lifetime ISA different from other ISAs is that the government pays a 25% bonus on the total amount paid into the account.
So, if you deposited the maximum amount of £4,000 in a single tax year, a further £1,000 would be deposited into the account by the government, for free, to boost your savings.
It’s worth noting though that any funds deposited into a Lifetime ISA will count towards your overall annual ISA limit (keep an eye on the ISA limits each tax year here).
Who can open a Lifetime ISA?
Just like other ISAs, to be eligible to open a Lifetime ISA you must be a UK resident, or a member of the armed forces serving overseas (or their spouse or civil partner).
You must also be aged between 18 and 39, as a Lifetime ISA can only be opened before you turn 40. That said, you can put in up to £4,000 each year until you’re 50 as long as you make your first payment into your ISA before you’re 40.
A Lifetime ISA is for individual savers, so can’t be opened with someone else. If you’re planning to buy your first home with another first-time buyer, provided you both meet the eligibility criteria, each of you could open your own Lifetime ISA account though.
How many Lifetime ISAs can I have?
There’s no need to worry if you’ve already opened a Cash ISA, as this won’t affect your eligibility to open a Lifetime ISA. You can also open a Lifetime ISA even if you already have a Help to Buy ISA, although you can’t get the first-time buyer’s bonus on both. You can open more than one Lifetime ISA account, but be aware that you can only make deposits into one Lifetime ISA during each tax year (and will only receive bonus payments on deposits made).
A Lifetime ISA can’t be opened on behalf of anyone else either. So, if you’re looking to help a family member or friend to buy their first home, giving them cash to put into their own Lifetime ISA account may be the best way.
How do Lifetime ISAs work?
For every year that you deposit funds into a Lifetime ISA, the 25% bonus will be paid. The bonus is paid only on the deposits made into the account (meaning you won’t get a bonus amount on any interest earned or any investment growth).
The bank or building society that provides your Lifetime ISA will make arrangements regarding your bonus payments. The bonus payments are paid directly into your Lifetime ISA account, for each month that a deposit is made.
It’s worth noting that a Lifetime ISA is designed to be a long-term savings account. So, there are restrictions on withdrawing funds (which we’ve detailed below).
However, just like a normal ISA, you can transfer a Lifetime ISA between different providers to take advantage of better rates.
Withdrawing funds from a Lifetime ISA
If you’re using a Lifetime ISA to buy your first home, you must wait at least 12 months from opening the account before withdrawing the funds. Additionally, it will only be accepted towards a property (or land) that is:
- Located in the UK
- Priced at £450,000 or less
- Purchased with a mortgage
- Where you intend to live (and be the only home you own).
If you’re buying a property with another person, you can use your Lifetime ISA funds even if they aren’t a first-time buyer themselves. Alternatively, if you both hold a Lifetime ISA, both sets of bonuses may be used towards the purchase.
If you’re using a Lifetime ISA to provide for your retirement, you must wait until you turn 60 years old before withdrawing the funds, to avoid a penalty being applied.
It is also possible to withdraw the funds early from a Lifetime ISA if you become terminally ill.
If you want to withdraw your Lifetime ISA funds for any other reason, then a penalty charge will be applied. The penalty is 25% of the whole account balance (not just the deposits made). This means you will get back less than you deposited into the account!
Are there different types of Lifetime ISA?
Lifetime ISAs are available as both cash savings accounts, and as investment (stocks and shares) accounts.
Cash ISAs are the safer option. However, if you are looking for long-term growth, then stocks and shares ISAs have historically outperformed cash savings and might be the right choice for you. Stocks and shares are less likely to be the right choice for anyone looking for a short-term investment. This is because the money you put in might not grow and could even fall. This means you could get back less than you put in.
If you’re not sure about which ISA to choose or which is best for your circumstances, it can be useful to speak to an independent financial advisor.
Are Lifetime ISA’s safe?
For both cash and investment account types, if your Lifetime ISA provider goes into administration, then you will still benefit from the UK’s Financial Services Compensation Scheme (FSCS). This means you will get up to £85,000 savings safety protection. However, this protection only applies per institution and NOT per account. So if you hold other savings accounts with the same provider, it could take you over the limit.
Lifetime ISA pros and cons
The 25% bonus sounds good, but you might still be asking, ‘Is a Lifetime ISA the best option for me? What are the pros and cons of opening a Lifetime ISA account?’
The key benefits of a Lifetime ISA are:
- It’s a tax-free savings account to put money aside for your first home or later life.
- The government provides a generous 25% bonus on your deposits, up to a maximum bonus amount of £1,000 in a single tax year.
- As the bonus is paid every month, you benefit from compound growth (which means you earn interest on the bonus payments as well as your own deposits).
- You can hold one or more Lifetime ISAs alongside other ISA account types. You can transfer between providers to take advantage of better rates.
The key restrictions of a Lifetime ISA are:
- It’s a long-term savings account designed specifically to help you put money aside for your first home or later life . If you’re saving for something else, this isn’t the right product for you.
- If you decide to withdraw your funds early or for a different purpose, then there will be penalties (and you could end up with less than you put into the account).
- Deposits into a Lifetime ISA are capped at £4,000 in any tax year. This will still count towards your overall ISA limit.
It’s important to think about how much you can save, what you’re saving for, and what access you need to your funds, to pick the best savings account/s for your circumstances.
Please note that this article is intended for educational purposes only. Suffolk Building Society does not offer Lifetime ISAs at this time.
