Lifetime ISA (LISA): work & best providers

Concerned about not being able to finance a home purchase? You might obtain free money for your first house in the form of a lifetime ISA worth up to £1,000.

A third of students didn’t know what a LISA was, and just 18% of those polled had one, according to our most recent Student Banking Survey. We feel it is our obligation to spread the word because there is up to £1,000 in free money available each year!

The fundamental benefit of the Lifetime ISA, which is simply a beefed-up tax-free savings account, is that for many young people, it may be their last chance to scrape together the funds necessary to put themselves on the housing market.

Since there is no required minimum monthly savings amount with LISAs, you can save as little as you desire and develop the habit of setting money aside each month. So how do they function?

Lifetime ISA summary

If you don’t have time to read about the LISA in detail, here’s a quick summary of all the main details:

1. You can pay a maximum of £4,000 into your Lifetime ISA each year
2. The government will then give you a 25% bonus of what you save (so a maximum of £1,000 each year)
3. The earliest you can use your LISA fund is one year after making your first deposit
4. You must be aged between 18–39 to open a Lifetime ISA
5. You’re able to make deposits and get the 25% bonus on savings each year up to the age of 50
6. You can’t use the money in your LISA unless it’s to buy your first home, you’re aged 60 or over, or (sadly) if you’re terminally ill with less than 12 months to live
7. The maximum house value you can put the LISA towards is £450,000 (on a property anywhere in the UK)
8. You can combine your LISA with a partner to buy a house (who can also use their own LISA)
9. You can’t use the LISA to buy a property to let – you must intend to live there
10. You are allowed to have a Help to Buy ISA open at the same time as a LISA, but you cannot use both to buy a property (note: you can no longer open Help to Buy ISA accounts)
11. You can transfer any Help to Buy funds into your LISA
12. WARNING: If you withdraw the money early (i.e. before age 60 without putting it towards your first house) you’ll be charged a 25% fee (equivalent to losing your 25% bonus and a fine of 6.25% on what’s left).

What is a Lifetime ISA?

Let’s begin with the fundamentals: An ISA (Individual Savings Account) is a type of bank account that enables tax-free annual savings.

The appeal of an ISA used to be that you had to pay tax on interest gained in a standard savings account, but not on interest earned in an ISA (as long as you followed the regulations; more on that later).

However, as of right now, basic-rate taxpayers (those making less than £50,270 annually) are exempt from paying taxes on interest payments totaling up to £1,000 per year across all of their accounts.

This has caused many to assert that the ISA is no longer in operation. The Lifetime ISA (LISA) is a different kettle of fish from ordinary ISAs, and one that we really like. Whether or not this is true for standard ISAs is a topic for discussion on its own.

The LISA, which adds an additional 25% to what young people save to cover the down payment for a first house, is one way the government helps them get on the housing ladder.

You may be eligible for an additional £1,000 in free money from the state each year; we’ll go into more specifics later.

Additionally, the LISA can be utilised as a retirement fund if purchasing a home is not what you want to do (more on that later).

Should students get a Lifetime ISA?

Lifetime ISAs are undoubtedly an excellent alternative for saving for anyone who is considering safeguarding their future, including students and recent graduates.

Even while planning for retirement or your first house purchase may seem a little ridiculous to you right now, keep in mind that saving takes time. As a result, it’s wise to begin considering this information as soon as possible.

It’s also important to note that having a LISA will not have any influence on your ability to repay student loans or how much of a maintenance loan you are eligible for.

Reasons to open a LISA

Here are some good reasons to open a Lifetime ISA:

• You’ve received some inheritance money after a family member has passed away, and are unsure about how to invest it
• You find you normally have a bit left over after Maintenance Loan payments come through, but normally just put it in a savings account or treat yourself to something nice
• You’re thinking about buying your first home within the next 10 years
• You’d like to become self-employed after uni, so might not have a pension scheme.

What is a Lifetime ISA for?

There are only three times you may withdraw money from your Lifetime ISA without incurring fees.

The other two circumstances in which you can withdraw from your LISA are: Sorry, it’s gloomy, but we had to say it! You have a fatal disease and are given fewer than 12 months to live.

Buying your first house

The LISA is an excellent option if you want to start climbing the property ladder as quickly as possible provided that you are:

1. Looking to buy a property in the UK
2. Don’t already own a property or have a share of a property (anywhere in the world)
3. Are planning to buy a property to live in yourself rather than rent out to others
4. Will be looking to buy a house that costs less than £450,000.

LISAs from you and your partner can be combined to buy a new house.

Additionally, and perhaps most importantly, after you buy a house, your LISA won’t close on its own. You have the option of closing it or keeping utilising it to accumulate money for retirement.

Saving for retirement

You can keep using your LISA as retirement savings if you start saving for a home but later decide, for whatever reason, that you don’t want to utilise the LISA to purchase your first home. This will save you from losing your bonus money and paying the penalty.

Although there is nothing you need to do in this scenario, it does mean you won’t have access to the funds until you become 60 (although bonuses will no longer be given after you turn 50).

If you do want to utilise your LISA for retirement, you shouldn’t consider it a replacement for a pension plan because the latter will offer you a lot better bargain over time. Rather, it’s a pleasant extra benefit.

How much can you save with a Lifetime ISA?

How much you save with a LISA depends on how much you put into the account each year. There’s no minimum amount that you have to pay in monthly or annually, so you can pay in dribs and drabs if and when you can afford to.

There is a cap, though: the annual contribution to your LISA is limited to £4,000. You may earn up to an additional £1,000 in cash with the government’s yearly 25% bonus, taking your yearly savings to $5,000.

Remember that regardless of when you start your account, ISAs follow the tax year (6 April to 5 April). If you start it in January, you have until April 5 of that year to deposit (up to £4,000) and get the bonus for that year.

Best case scenario: If you start a LISA at age 18 and contribute the maximum of £4,000 year, by the time you reach retirement, you will have saved $128,00 and will also have received an additional $32,000 from the government. With the increased interest over time, that amounts to an additional £160,000 in today’s money, which is a significant amount of free money.

Also keep in mind that you only get the bonus for what you put in. The government incentive will always be the same, regardless of the interest rate on a cash LISA or how much you earn with a Stocks & Shares LISA.

How do you get your Lifetime ISA bonus?

You may choose between monthly and annual payments for the 25% bonus on your Lifetime ISA, and you can earn interest on the whole balance of your account. However, as the interest gained is not applied to your £4,000 bonus, you cannot utilise it to increase your bonus.

Furthermore, although though the 25% incentive is given on a monthly basis, you are not required to make deposits on a monthly basis in order to earn it. You can still earn 25% on your contributions if you’d like to make a one-time lump sum payment.

It’s also important to keep in mind that if you use the LISA to buy a home, the money will flow directly from the bank to the lawyer overseeing the transaction.

This means that even while you may watch your money increase and the bonuses come in, you won’t be able to get your hands on the money since it will be transferred between banks and attorneys.

The only exceptions to this rule are if you opt to withdraw the money early and pay a penalty, or if you do so after turning 60 and receive a direct payment.

Early withdrawals and other Lifetime ISA risks

ISAs are an excellent method to protect your money, especially from you! There will always be certain hazards, and even while they shouldn’t cause you a lot of concern, you should nonetheless be aware of them.

Don’t worry if you decide you no longer want to use the bank or building society that holds your LISA; you can easily switch to a new provider and keep all of your interest and bonuses (although some providers may charge an administrative fee once).

However, there is often a 25% tax on the sum that you withdraw if you decide you want your cash before you reach 60 and you don’t want to use it to purchase your first house.

This amounts to your full 25% government incentive plus an additional 6.25% on top. This is due to the fact that once the government incentive has been taken into account, the 25% fee will be levied to the money you have saved.

Consider the scenario when you have £1,000 in your LISA and a £250 25% bonus. You’ll be required to pay a 25% penalty on the full sum of £1,250, or £312.50, if you choose to make an early withdrawal. As a result, instead of receiving your initial $1,000, you will now only get £937.50.

The two forms of Lifetime ISA are also associated with other risks:

Cash LISA risks

This most closely resembles a typical savings account in that you may pick how much money to deposit and earn a set amount of tax-free interest on it.

The only danger associated with this choice is if the bank where you keep your LISA goes out of business; in that event, you’ll be covered up to £85,000 in insurance. While this seems like a lot—and, to be honest, it is—anything above £85,000 in your LISA balance might be lost if the bank fails.

Stocks and shares LISA risks

In this variation, your LISA funds are directly invested in stocks and shares.

This alternative requires greater risk-taking, as is usually the case with anything that depends on the stock market, but if your shares do well, you may get a bigger return. Of course, you might lose money if your assets underperform.

Additionally, there are costs associated with stocks and shares LISAs that can deplete your funds (maybe not much, but it’s still your money!).

We would always advise that you conduct thorough study and seek expert advice before making this type of investment due to the uncertainties and hazards involved.

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