Grey house with 'Lifetime ISA' green banner

Lifetime ISAs could gift you a free £33,000. That British dream of buying your first home is expensive and tougher than ever before. However, using a Lifetime ISA which is specifically designed to help first-time buyers can make that first step on to the property ladder far easier and quicker. Or you may just want a hand saving for retirement. Either way, here’s what you need to know about Lifetime ISAs and getting your hands on that free lolly.

Want to know everything about ISAs and the other types available? Check out our Ultimate ISA Guide to Powerful Tax-free Savings.

What is a Lifetime ISA?

TL;DR – A Lifetime ISA is a specific type of ISA that can only be used for two purposes:

  1. A first-time home purchase
  2. Retirement

As with any ISA, it is a tax-free wrapper, which means any interest or earnings you money makes is free from interest. Nice.

Even nicer still is that the Government will put in 25% of what you do, up to a maximum of £1,000 per year.

Green checklist table describing a Lifetime ISA

How does the free 25% work?

The Government wants us to buy our own homes and save for our own retirement. So, it’s happy to incentivise us to get started.

It will contribute 25% of whatever you put in, up to £1,000 per year and until you are 50 years old.

It’s paid monthly but can take 4 – 9 weeks to hit your account.

Even better, this £1,000 doesn’t affect your £4,000 annual limit.

So if you max-out your allowance, that’s a total of £5,000 each year.

And if you started from when you were 18 years old through to the maximum age of 50 you can keep paying in, that’s a massive £33,000 free!

If you’re a first-time buyer, maybe you’d have hoped to buy your first property by age 50. But if you’re using a Lifetime ISA for retirement, think of that free money plus compounding over 40+ years!

Do I have to pay back the 25%?

Here’s the rub: whilst you can withdraw money at any time before you are 60, if you’re not using it for a first-time home purchase, you’re going to get penalised 25% of your funds. But in reality, the maths make it worse than that:

Example: Imagine you had saved £4,000 in a single tax year and received an extra 25%. You’d now have £5,000 (excluding interest for sake of ease). If you then closed the account and didn’t use the money for the intended Lifetime ISA purposes, you would be penalised 25% of that £5,000. That means a penalty of £1,250, so you’d actually get back only £3,750.

You don’t pay the 25% penalty if:

  • You use the funds for a first-time home purchase
  • Withdrawing after age 60
  • You die
  • Are terminally ill with less than 12 months to live
  • Property is left to you, but the person gifting you the house is still alive

But you do pay the 25% penalty if:

  • You withdraw the money before age 60 for purposes other than a first-time home purchase
  • You inherit a house a try to use your Lifetime ISA to buy a property, as you are no longer a first-time buyer. In this case, it’s likely better the leave the funds accumulating until you can withdraw the money penalty-free at 60. Consider it an early-retirement present to yourself.

Who is eligible for a Lifetime ISA?

The conditions of who can open a Lifetime ISA are a little more restrictive than usual in that they have a top-end age limit.

Blackboard showing who can open a Lifetime ISA

Types of Lifetime ISA

To add another flavour to this, there are two main types of Lifetime ISA:

  1. Cash Lifetime ISA
  2. Stocks and Shares Lifetime ISA

These are essentially the same as their ‘normal’ ISA versions.

A Cash ISA is essentially a savings account and you don’t pay tax on the interest. And as the name suggests, a Stocks and Shares ISA is where you will be investing.

The only difference is that the money sat inside either flavour of Lifetime ISA is subject to the specific LISA conditions, including your 25% bonus.

Lifetime ISA for first-time buyers

There are some additional conditions when using a Lifetime ISA to make a home purchase:

  • For first-time buyers only – you can not have ever owned a property in the UK or anywhere in the world before
  • Maximum home value of £450k
  • You must have held the LISA for 12 months or more
  • You must be living in the home and not renting it out, for example
  • Must be using a traditional repayment mortgage
  • Cannot be used with the bonus from a Help to Buy ISA

Buying a property with someone else

If you’re both eligible to use the Lifetime ISAs, then these can be combined and used to purchase the same property.

If one of you isn’t eligible and the other is, the person who is can still use their Lifetime ISA towards the joint home purchase.

What about Help to Buy ISAs

If you have a Help to Buy ISA and a Lifetime ISA, you can only use the bonus from one of these products to purchase a house.

A Lifetime ISA allows you to save a healthy £4,000 per year, versus £2,400 in a Help to Buy ISA. As long as you don’t plan to buy a house within 12 months, then a Lifetime ISA can provide greater rewards.

If you think it’s worth it, you can convert or transfer a Help to Buy ISA into a Lifetime ISA.

There are also flexibility benefits with a Help to Buy ISA, as you can withdraw your initial deposit without penalty (and without the bonus of course) if you choose to. Withdrawing from a Lifetime ISA, however, will mean you have to pay back the 25% monthly bonus you have been accruing.

For more information on a Help to Buy ISA and whether they are better than a Lifetime ISA, check out this article.

How much can I pay into a Lifetime ISA?

Currently, you can pay in a maximum of £4,000 per tax year (the tax year ends on April 6th).

This does come out of your £20,000 total ISA allowance, leaving you £16,000 for your other ISAs.

The Government contribution of up to £1,000 does not affect your £4,000 Lifetime ISA or £20,000 total ISA allowance.

What is the Lifetime ISA allowance for 2019/20?

The current Lifetime ISA allowance for 2019/20 is £4,000.

It has remained at this level since it’s introduction in 2017.

Can I have a Lifetime ISA and a pension?

The short answer is yes you can. But the questions is: should you?

For most people, paying in to a Workplace Pension Scheme with employer contributions is a far better option.

For others, such as the self-employed, then a SIPP (Self Invested Personal Pension) is usually the way to go.

They are both far more efficient, as they take money from your gross pay before you are paid and taxed.

If you don’t fall into these categories or perhaps simply want a retirement fund you can get your hands on at 60, then a Lifetime ISA may be for you.

Dive down this rabbit hole further with this article: Lifetime ISA – Better Than an ISA or Pension?

Can I pay into a Lifetime ISA and Cash ISA?

Yes, you can pay into different types of ISA during the tax year. So for example, you can pay into both a Lifetime and Cash ISA as long as you stick to their conditions.

However, be aware that you can only pay into one ISA of a certain type per tax year. This means you cannot pay into two Lifetime ISAs or two Cash ISAs.

Where can I get a LISA?

Initially, Cash LISA providers were limited however now they can be provided by most high street banks and financial institutions.

Provider choice for a Stocks & Shares LISA is more limited. The main providers are Hargreaves Lansdown & AJ Bell. Newer players on the market like Nutmeg & Moneybox also offer LISAs with limited investment options.

WARNING: Investments in Stocks & Shares are generally considered riskier than the cash equivalents. Investments in Stocks & Shares should be considered over a 5+ year investment horizon. If you need your cash for a house deposit within a few years then a cash LISA will ensure your capital is not put at risk.

If you want more information on platform providers here are our reviews for Hargreaves Lansdown & Moneybox.

For the current LISA best buys check out Money Saving Expert.

Lifetime ISAs, for those eligible, can provide massively helpful free money to get on that first rung of the property ladder. If being used for retirement, then it’s worth checking if there are better options for you, but they may still have their place.

EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. Investments may go up as well as down and you may get back less than you put in.

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Lifetime ISA – there IS such a thing as free money
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