It’s not often the Government offers you free money, but if you qualify for a lifetime ISA (LISA), the bonus that the Government pays you looks a lot like… well, free money.
With that in mind, we better take a closer look so as not to let it go to waste!
Lifetime opportunity
The lifetime ISA offers a bonus to younger savers of up to £1,000 a year, which they can either put towards the deposit on their first home, or save long-term for retirement. This isn’t quite money for nothing, though. You have to pay in to get that bonus, but it’s worth taking time to see how it works, because there’s a fair bit of money in it for you. And better still, it’s free of tax.
Here’s how it works
For every £4 you save in a lifetime ISA, the government will give you £1, a bonus of 25%. You can save up to a maximum £4,000 a year and claim the full £1,000 annual bonus. If you can only muster, say, £500, you will still get £125. Which isn’t bad, is it?
It isn’t open to everyone, though.
You can only set up a lifetime ISA between ages 18 and 39, but once it’s set up, you can then keep claiming that bonus on money you pay in until age 50. Somebody who opened a lifetime ISA on their 18th birthday and contributed the maximum £4,000 every single year until 50 would get a total bonus of £32,000, assuming rules stay as they are.
Too bad if you were born after 6th April 1977, but even if that’s the case, you can help out your younger family members and friends by alerting them to this potential opportunity. Parents and grandparents can also pay into a lifetime ISA opened by a child or grandchild.
Watch out for the downsides!
The lifetime ISA counts as part of your overall annual £20,000 ISA allowance. So you don’t get it on top, I’m afraid. That means if you max out the £4,000 of the lifetime ISA, you can only put £16,000 towards other ISAs. This may be a fine trade-off for many people, but it’s still worth keeping in mind.
As far as using the money you’ve saved in your lifetime ISA, if you want to use it as a deposit on a home, this must be your first home and it cannot cost more than £450,000. You will be ruled out if you have ever owned a property before, even that’s a part share of an inherited property inside or outside the UK. You also cannot use the deposit for an investment property.
If you don’t use the money for a deposit, you can continue paying in and claiming your bonus, provided you don’t touch your pot until age 60. If you withdraw the money before that age for any reason, other than to buy your first home, you will face a stinging 25% exit penalty.
Take your pick
There is still only a narrow choice of lifetime ISA providers, but these include familiar names such as AJ Bell, Hargreaves Lansdown, Nutmeg, OneFamily, Scottish Friendly, Skipton Building Society and The Share Centre. Some may let you open an account with just £1, while others demand £100 or even £250. Minimum regular investments typically start at £25 a month.
You can invest in either cash or stocks and shares. Those who plan to buy a property in the next few years might want to play safe, while long-term investors could consider stocks and shares.
It’s your choice
You should consider your other investment options too. For example, if you are enrolled on a workplace pension that should have first call on your cash, because you could get both employer contributions and tax relief, which works out as £1 for every £1 you pay in.
You might also consider a personal pension, which offers 20% tax relief for basic rate taxpayers, and 40% for higher rate taxpayers.
In my view, the important thing is to claim something. These programs from HMRC can offer a great opportunity to build up your savings pot, so don’t waste it!
Editor’s note: A previous version of this article stated that using a lifetime ISA for a home deposit was limited to home purchases of £250,000 or less outside of London. The article has been updated to reflect that, at the time of writing, the lifetime ISA can be used for a deposit on a home purchase of up to £450,000 both inside of and outside of London. We regret the error.
