Lifetime ISA – What is it and How Does It Work?
Since the Help to Buy to ISA scheme came to an end in December 2019, the Lifetime ISA is one of the numerous options that first time buyers have when it comes to buying their first home.
What is a Lifetime ISA?
A lifetime ISA is a savings scheme that is tax efficient. It has been designed to aid people in getting onto the property ladder.
The way the scheme works is the government pays 25% of whatever you save. So, for every £4 you save, the government will contribute £1. The maximum you will be able to save per year is £4000, to which the government will contribute £1000. The buyer will receive the government contribution at the end of the year, so you can earn interest thereafter.
However, the contribution will only be made to the account once you reach the age of 50.
The money can be used at any time in to buy the first home. Otherwise, it has to remain in the account until the account holder reaches 60.
To put it simply:
- A lifetime ISA can be opened after the age of 18 and before the age of 40
- Payments can be made into the account
- You can buy the first property at any time
- Use the cash for any purpose once you’re 60
Who can invest in a Lifetime ISA?
Those who qualify for a Lifetime ISA will need to be aged 18 – 40 years old on the date the account is opened.
A Lifetime ISA can be opened alongside a Help to Buy ISA and a pension fund. You are also allowed to open a Lifetime ISA if you already own a property. The £4,000 limit, if used, forms part of your overall annual ISA limit. The ISA allowance for the current 2019/20 tax year is £20,000.
What is the maximum I can invest in a Lifetime ISA?
Per annum, the maximum that can be deposited into the account is £4000 which will make up part of your overall ISA allowance, which is £20,000. The government contribution will be paid on top of this.
Are there any drawbacks with a Lifetime ISA?
If you later decided to withdraw the cash from the Lifetime ISA, there will be a 25% charge, (this in effect repays the government bonus earned to that point), unless it is used for any of the below situations:
- Buying your first home
- If you’re aged over the age of 60
- If you’re terminally ill, with less than 12 months to live
Once you turn 50, you will not be able to pay into your Lifetime ISA or the 25% bonus. If the account stays open, and no action is taken, you will still earn interest or investment returns.
If you’re on the property ladder already, you can only use a Lifetime ISA to save for retirement since with the Lifetime ISA it can only be used to save for a deposit on a first one.
Furthermore, the Lifetime ISA can only be used towards a deposit for a house that is less than £450,000.
What’s more, first-time buyers can only use Lifetime ISA cash to fund a deposit if the property they are buying costs less than £450,000.
With a Lifetime ISA, the government contribution is given at the end of each tax year.
The money saved in the ISA can be used for a deposit for your first home and the account can be kept open and in use after the purchase.
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