Lifetime ISA: a 25% Government Bonus Towards First Home or Retirement!

By Michelle Murphy

In 2017, the Government introduced a new type of ISA known as a Lifetime ISA.  Savers aged between 18 and 39 can open a Lifetime ISA to save for a first-time property purchase and/or retirement.

Lifetime ISAs are a great way of children or grandchildren saving a deposit towards their first property and receiving a government bonus.  As well as their own savings, other family members can contribute on their behalf.

What is an ISA?

ISA stands for Individual Savings Account.

An ISA is a tax efficient wrapper that can contain cash or investments (stocks and shares).  Interest and investment growth within an ISA wrapper is free of income and capital gains tax.  Neither tax is payable on withdrawals.

You can save up to £20,000 into an ISA each tax year.

What is a Lifetime ISA?

An ISA that allows you to pay in a maximum of £4,000 per tax year until your 50th birthday.  You will receive a 25% government bonus on any contributions.  If you pay the maximum £4,000 contribution, you receive a £1,000 bonus.

The bonus is applied directly to the Lifetime ISA, usually within 8 weeks of the original contribution.    This is before any interest or growth.

If you pay the full £4,000 into a Lifetime ISA, you can still contribute up to £16,000 into a cash ISA and/or a Stocks and Shares ISA.

Anyone aged between 18 and 39 can open a Lifetime ISA, and there are 2 main uses:

  1. Saving for your first property purchase
  2. Retirement from age 60.

Using a Lifetime ISA for a Property Purchase

You can use your Lifetime ISA towards a property purchase providing that:

  • You are a first-time buyer
  • The property is in the UK
  • The property is worth £450,000 or less
  • It is the only property you own and where you intend to live (not a buy-to-let)
  • The property is purchased with a mortgage.

The Lifetime ISA must also be open for at least 1 year before using it for a property purchase.  If you buy a property with someone else and they meet the above criteria, they can also use a Lifetime ISA and receive bonuses towards the purchase.

What if I withdraw from a Lifetime ISA for another reason?

There are only 3 occasions when you can withdraw from a Lifetime ISA penalty free:

  1. First time property purchase
  2. Retirement from age 60
  3. If you are diagnosed with a terminal illness.

If you withdraw funds for a reason other than those listed, you will pay a 25% penalty.

For example, you could contribute £4,000 into a Lifetime ISA and receive a bonus of £1,000, meaning the account has a balance of £5,000.  If you then withdrew £5,000 for a reason other than those permitted, you will pay a penalty of £1,250, getting back £3,750.  This means you lose the £1,000 bonus and pay a penalty of 6.25% on your original contribution.

If you have any questions, please contact the adviser team.