How young savers can get a 25% bonus of up to £1,000 with the Lifetime Isa… but beware an expensive penalty if you don’t play by the rules
- Savers aged under 40 can open a Lifetime Isa and save up to £4,000 a year
- It is aimed at those buying a first home and can also be used for retirement
- Cash and investment versions are available but the money cannot be withdrawn without being subject to a 25% penalty – costing savers their own cash
A Lifetime Isa is a tax-free savings account designed to help you either save towards buying your first home or build a nest egg for retirement.
You can deposit up to £4,000 every tax year into a Lifetime Isa. But the real advantage is the 25 per cent bonus on offer from the Government to top up your contributions.
It means that for every £4 you save, the Government chips in £1. If you save the annual maximum of £4,000, you receive a £1,000 bonus. To qualify for a Lifetime Isa – often referred to as a Lisa – you must be aged between 18 and 39.
The Lifetime Isa is aimed at those saving for their first home or for retirement
The 25 per cent bonus is only paid until you are aged 50, at which point you are no longer able to contribute. If you decide to use it as a pension pot you cannot access it until age 60.
It is possible to put your Lifetime Isa contributions into either cash or investments.
Most people opt for cash because they want to access their funds to support a home deposit in the short to medium term. Those who use the tax-free wrapper to build a retirement fund are more tempted to invest in stocks and shares as their time horizons are longer.
First-time home buyers can use a Lifetime Isa to help fund their purchase so long as the value of the property they are buying does not exceed £450,000. If two people are purchasing a home together, they can both open a Lifetime Isa and each benefit from the 25 per cent bonus. But the value of the property must still not exceed £450,000.
First-time buyers need to save into a Lifetime Isa for at least 12 months before they can withdraw their cash, otherwise they will lose the cash bonus.
There are drawbacks to taking out a Lifetime Isa, especially if you need to access the money in a hurry. Rachel Springall, savings expert at financial data scrutineer Moneyfacts, says: ‘The penalty for quitting a Lifetime Isa could leave you financially worse off than if you had never put money in. So think carefully before signing up.’
There is a 25 per cent penalty for accessing your cash early, although this has been reduced to 20 per cent for the current tax year due to the impact of coronavirus on many people’s finances.
From April 6, the penalty returns to 25 per cent. The penalty could cost you dear as it is levied on both your, and the Government’s contributions. For example, if you paid in £1,000 and received a £250 bonus, you would have a pot worth £1,250.
The Treasury temporarily cut the Lifetime Isa penalty to 20% for a year but it will increase to 25% on 6 April again
If you then decide to take the money out, the penalty is calculated on the full £1,250. That means you only get back £937.50 – less than the amount you have put in. You will have lost the equivalent of 6.25 per cent of your investment.
Such stiff penalties mean anyone looking to take out a Lifetime Isa must be sure about their intention to either buy a first home or to use the account for retirement funding. If this is not the case you are better off with a traditional Isa or pension.
Only in exceptional circumstances – if you are diagnosed with a terminal illness and medical experts have given you less than 12 months to live – will money be refunded without penalty.
The Lifetime Isa was launched in April 2017 as a replacement for the Help to Buy Isa launched two years earlier. The Help to Buy Isa – which stopped being offered in November 2019 – can still be saved into by existing holders until November 2029.
Springall says: ‘You can transfer a Lifetime Isa to another provider without penalty, or transfer money from a Help to Buy Isa into a Lifetime Isa without charge. But if you switch to another type of Isa you will lose the bonus.’
The Lifetime Isa is counted as part of the overall annual Isa allowance of £20,000. This means you can still take out another Isa on top of your Lisa.
Lifetime Isa providers are thin on the ground.
They include building societies Skipton, Nottingham and Newcastle. Others are The Share Centre, Hargreaves Lansdown, AJ Bell, Foresters Friendly Society, Unity Mutual, Nutmeg, Moneybox and Paragon Bank.