What is the new Lifetime ISA?

Whilst information from the government is not yet complete, this is a guide to what has been announced so far.  We will update this information when further details are known.

The Lifetime ISA is a savings plan in which you can save up to £4,000 a year and get a 25% bonus from the government at the end of each tax year.

You don’t have to deposit the money into the savings account all in one go.  You can put money into the account whenever you wish.

So, if at the end of the first year you have saved £4,000, the government will deposit a further £1,000 into your account at the end of the tax year.  Once its in your account, it’s yours, and you’ll earn interest on it too.

You can open a cash LISA (where the money stays in a savings type account and earns a set amount of interest), or an investment LISA (where the money is invested on the stock market so interest is dependent upon its performance).

The new LISA will be available from April 2017.

Is there an age limit?

You can start saving when you are 18 and the bonus will be paid until you are 50.

You will only be able to open a LISA between the ages of 18 and 40.  You can leave the account open as long as you want to.

If you are over 40 on 6 April 2017, you will not be able to open a LISA, but you may still be able to open a Help to Buy ISA if it is to buy your first home.

Is there a limit to how much can be saved?

You can save up to £4,000 a year between the ages of 18 and 50.  The maximum bonus you can receive is, therefore, £32,000.

The bonus is paid on the actual amount of money you put into the account in the relevant year, not on any interest received.

What can the money be used for?

You can use the money in the LISA towards buying your first home that must cost less than £450,000, providing you have had the LISA for 12 months or more. It must be a UK residential property.  If you buy a property worth more than £450,000, you will lose the bonus.  Be aware too that it must be the first property you have owned – either within, or outside the UK – and that includes shares in a house that you might have inherited, for example.

You can also take the money out of the account after you are 60, to use towards your retirement.

If you take out the money to buy your first home, you can continue saving up to £4,000 a year, and earning a bonus, until you are 50 and use the money towards your retirement from 60 onwards.  You don’t have to take it out at 60, you can leave it in to earn interest and draw it out as and when you wish.

In both cases, there is no tax to pay when you draw the money out of the LISA.

Can money be withdrawn for anything else?

You can withdraw money from your LISA if you are not buying a house, or you are not 60, but you will lose the bonus accrued on that amount – and of course you will lose interest on the money and the bonus.  More importantly there will be a 5% penalty on the amount withdrawn.  Consultations are ongoing as to whether the penalty will be repaid if the money is paid back into the account – i.e. the funds are just ‘borrowed’.

Can both people in a couple have a LISA?

Yes, the LISA is an individual product and you can both have one.

If you are both first time buyers, you will be able to use the money in both LISAs towards a property of less than £450,000.  However, if one of you has owned a property before, you will only be able to use the savings on the LISA of the one who hasn’t.  The savings in the account of the person who has owned a property previously can then only be used towards retirement.

Can I have a LISA and a Help to Buy ISA?

Yes, you can have both, but you can only use the bonus from one of them towards buying a house.

The Help to Buy ISA also attracts a 25% bonus but on a maximum amount of £12,000, so the maximum bonus is £3,000.  If you use the LISA, and its bonus, to buy your first home, you will lose the bonus in the Help to Buy ISA, but the money and interest in there are still yours and can be used towards the purchase.

If you use the Help to Buy ISA and its bonus to buy your first home, you would pay a penalty on the bonus in your LISA if you used those funds towards the house too, but you would still be able to use the LISA for retirement.

You can transfer a Help to Buy ISA into a LISA when they become available next year if you want to.  Help to Buy ISAs are available to anyone over the age of 16.  Find out more about the Help to Buy ISA.

Read the governement’s technical note on the design of the Lifetime ISA.

Find out how Graysons can help you with your first time house purchase.