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The Lifetime ISA was launched in 2017 and offers savers the opportunity to put away up to £4,000 a year between the ages of 18 and 50. It’s a rather different type of savings vehicle, as the money saved must be for one of two purposes: either for retirement or the purchase of a first home. Although the Lifetime ISA has stayed under the radar as a savings option it still has a lot to offer in terms of benefits.
It’s a savings vehicle that was designed to provide an opportunity for anyone to save in a tax efficient way. The big draw of the Lifetime ISA is the fact that the government will top up whatever is saved in it by 25% – up to a maximum of £1,000 a year.
You can put up to £4,000 a year into a Lifetime ISA, either paying this is as a lump sum, or as and when you can. The 25% bonus added by the government is paid into the ISA once a year. So, if you save £4,000 a year then you will have £5,000 a year after the government’s 25% has been added. Once the 25% bonus is in your Lifetime ISA account then you will be able to earn interest on what you’ve saved and also on the bonus – at the rate that the account offers. Your LISA can contain both cash and stocks/shares and the proportion you choose of each will depend on your attitude to risk.
There are two key restrictions to note when it comes to the Lifetime ISA. The first is the age limit. You must be at least 18 to open a Lifetime ISA and you must be under the age of 40. So, this is not a savings product that is open to everyone. The reason for the upper age limit is that you can only put cash into your Lifetime ISA up until the age of 50.
The second important restriction to note with a lifetime ISA is how the money you save can be used. You must use the savings in the ISA to buy your first home or to help pay for retirement. If you plan to use the money for other purposes then there is a 25% charge applied to the savings when you withdraw them from the ISA. Effectively, this means that you will lose the 25% bonus that the government has added to your saved cash. However, the way that the numbers work out mean that you will also lose some of your own savings if you use what you have in a Lifetime ISA for other purposes. For example, if you have saved £4,000 in one year and receive the £1,000 bonus from the government, 25% of £5,000 is £1,250. So, if you were to then withdraw the cash for other purposes you would lose the £1,000 from the government plus £250 of what you had saved. You can only avoid this charge if you withdraw the money from your Lifetime ISA:
Currently, there are not that many Lifetime ISAs available and the only provider offering a cash Lifetime ISA is The Skipton Building Society. The interest rate offered is fairly low but it’s the 25% government bonus that will be the real appeal for most people.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read about Alex Hartley
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