Everything you need to know about the Lifetime ISA
As the opportunity to open your Help to Buy ISA draws to a close, there is one alternative for you to consider, the Lifetime ISA.
With the Lifetime ISA (LISA) you have the opportunity to save up to £4,000 every tax year towards a first home or your retirement. The Government will add 25% bonus on top of the amount you save. Therefore, if you do save the maximum of £4,000 per year, that’s a £1,000 annual contribution from the Government. Another benefit of the Lifetime ISA is that you earn interest on the amount you save.
With the Lifetime ISA, you have two opportunities to use the bonus. The first is if you are a First Time Buyer, using it as a deposit to buy your first home and the second is for retirement once you have reached 60 years of age.
If you are using the LISA to help you buy your first home, you must be aware of a few terms and conditions. It must be the first property you have purchased, the purchase price must be less than £450,000 and it must be a residential mortgage and not a buy to let.
The maximum bonus is £33,000. That’s if you open the account at 18 and save the maximum of £4,000 per year until your 50. As mentioned above, although you can earn bonus until you’re 50, you can’t withdraw it until you are 60+. If you withdraw the funds early and not for the two reasons above, you could lose a percentage of the funds you’ve put in.
What are the disadvantages of a Lifetime ISA?
If you withdraw some or all of the funds not for the two defined purposes, you will incur a 25% penalty, equivalent to a loss of 6%. You may think at first glance, the Government put 25% in, so you only lose that benefit. Unfortunately, it doesn’t quite work like that.
For example, if you had saved a total of £10,000 and got a £2,500 bonus, therefore having a total of £12,500 including the bonus. If you withdrew the balance and closed the account, the 25% penalty is of the total amount. Therefore, you would get £9,375 out, losing £3,125, which is more than the £2,500 bonus the Government have provided.