A Lifetime ISA (LISA) is a special type of individual savings account that lets you put away up to £4,000 every year. The money can then be used for buying your first home or for retirement.
The reason that a LISA stands out against other similar savings vehicles is the 25% bonus: the government will top up your account with 25% of the amount that you’ve put in. So if you max out the annual limit each year, you could be getting £1,000 of free money. That’s on top of whatever interest the account pays.
A LISA might seem like the savings account of choice for anyone saving to buy a home – and in most cases that’s probably true. The accounts do come with a range of rules and stipulations though, so it’s worth doing your research first.
What if I already have a Help to Buy ISA?
Help to Buy ISAs are no longer available, but you may already have one open. This doesn’t restrict you from opening a LISA, however you would only be able to use the bonus from one account for buying a home. This means that it’s not necessarily advisable to use both accounts when saving for a deposit.
How does a LISA affect my overall ISA limit?
The money that you save into a LISA counts towards your overall ISA limit – £20,000 for the current 2020/2021 tax year.
This means that if you pay the full £4k into your LISA, you’d have £16,000 left of your allowance. The government bonus isn’t taken into account.
How quickly can I use the funds?
You need to have the account open for at least 12 months before you can use the money for a home purchase – otherwise you’ll lose the bonus and have to pay a withdrawal fee. That means a LISA won’t be right for you if you’re looking to move within the next 12 months.
What if I change my mind about buying a home?
One of the benefits of a LISA compared to the old Help to Buy ISA is the fact that the money isn’t exclusively available for buying a home. It can also be accessed after you turn 60, as a boost to your retirement fund. The money can also be withdrawn by those who have a terminal illness and are expected to have less than twelve months to live.
Otherwise, if you decide to withdraw the money early then you will be expected to pay a charge – currently 20% and expected to rise to 25% in the near future. A 20% fee equates to losing the full government bonus, while a 25% fee would mean that you also lose a small amount of the money that you paid in.
Are there restrictions on the kind of property I can buy?
The property has to be your first home, and you can’t own any other property (or have been involved in a purchase previously). There’s also a limit of £450,000 on the cost and an age limit between 18 – 39 years old. Finally, it needs to be a home for you to live in – not a buy to let property.