What is a Lifetime ISA and what are the requirements to hold this product?
- To open a Lifetime ISA, you must be UK resident (unless you’re a crown servant, their spouse or civil partner) and aged between 18 and 40.
- You can add up to £4,000 each year until you’re 50 but your first payment must be before you’re 40.
- The government will add a 25% bonus to your savings, up to a max of £1,000 per year.
- The £4,000 limit, counts towards your annual ISA (tax free) limit which for the 2024/2025 tax year is £20,000.
- You can hold cash or stocks and shares or a combination of both in your Lifetime ISA but note that you can only subscribe to one Lifetime ISA per tax year.
- When you hit 50, you can no longer pay into your Lifetime ISA or earn the 25% bonus, but your account will stay open, and your savings will earn interest or investment returns.
Pros of a Lifetime ISA?
- You can withdraw the money (without penalty), to buy your first home (provided you meet the conditions), if you’re 60 or over, or terminally ill, with less than 12 months to live (an “Authorised Withdrawal”).
- A Lifetime ISA is a great way to save for later in life given the 25% bonus (per year) on your contribution.
- You don’t have to stick with the same provider, you can transfer the whole amount in your account between different providers to make the most of better interest rates.
- Lifetime cash ISAs are covered by the UK’s Financial Services Compensation Scheme so up to £85,000 of your savings with a single banking institution are protected.
- Depending on your tax bracket, if you’re self-employed, a Lifetime ISA may be a good equivalent to a Workplace Pension Scheme to help with saving for retirement.
Cons of a Lifetime ISA?
- If you withdraw money outside that allowed as an Authorised Withdrawal, you’ll pay a 25% withdrawal fee which equates to around a 6.25% loss (i.e. it costs more than just the bonus received).
- Where the money is being used to buy a first home, it will only be an Authorised Withdrawal where the following condition as are met:
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- the property is £450,000 or less (which can be a challenge in high-cost areas like London);
- buying at least 12 months after your first payment into the Lifetime ISA;
- using a conveyancer / solicitor; and
- buying with a mortgage (can’t be a private mortgage e.g. one from a relative).
- Some providers will only accept transfers if you are aged 18-39 so your options of provider can be limited if you’re 40 or older.
- Money held in a Lifetime ISA is treated as savings and therefore could affect any means-tested benefits and is also seen as an asset for debt recovery purposes.
- If you save in a cash Lifetime ISA, inflation can erode the real value of your savings over time, especially in a low-interest-rate environment.
Next Steps
If you’d like to speak to an adviser about your wealth management and estate planning options, please click the link at the top of this page to book an appointment.
