If you have children or grandchildren who are saving towards a first home, they may benefit from a bonus on their money in a Lifetime ISA.
This is a type of Individual Savings Account (ISA) designed for people aged between 18 and 39 who are saving towards a first home or retirement.
The rules around how Lifetime ISAs work are quite specific, so read on to find out how they work.
What is an ISA?
An Individual Savings Account, or ISA, is essentially a tax-efficient savings account. Any returns you earn on money saved in an ISA are free from tax, and don’t need to be declared on a tax return.
You can only pay a certain amount into ISAs each year, known as your annual allowance. For most types of ISA this is £20,000 in the current 2023/24 tax year, though it works somewhat differently for Lifetime ISAs, as we explain below. You can save up to £20,000 in a single ISA, or spread your allowance across different types of ISAs if you wish. Your allowance resets each tax year on April 6, so it’s a ‘use it or lose it’ allowance each year, and you can’t carry any of it over.
You can read more about ISAs in general in our article Everything you need to know about ISAs.
How does a Lifetime ISA work?
A Lifetime ISA is designed for adults aged between 18 and 39 to save up to get on the property ladder. Once you turn 40, you can no longer open one of these accounts.
For every £1 saved into a Lifetime ISA (or LISA), the government contributes 25p on top as a bonus. However, the annual allowance on a Lifetime ISA is £4,000 (this is considered part of your total £20,000 annual allowance). So, if you were to pay the full £4,000 allowance into a LISA in a single tax year, you would earn a maximum £1,000 tax-free on top from the government, and have £16,000 left to contribute to other ISAs.
You can build returns on top of this as you normally would in an ISA, either as interest on cash savings (in a cash ISA structure) or as returns on investments (in a stocks and shares ISA structure). Bear in mind that Lifetime stocks and shares ISAs are much more common than Lifetime cash ISAs – there are very few of the latter to choose from.
Once you turn 50, you can no longer make payments into a Lifetime ISA or earn the government bonus. However, the account will remain open and earn interest or investment returns until you make a withdrawal.
What can savings in a Lifetime ISA be used for?
Lifetime ISAs are unlike other types of ISAs as savings in one of these accounts can only be put towards buying a first home or retirement.
Buying a first home
The primary use for Lifetime ISAs is saving towards getting on the property ladder. Money in a LISA can be put towards buying a home if:
- It is your first time purchasing a home
- The property is worth £450,000 or less
- The property is being purchased with a mortgage
- It has been at least 12 months since your first payment into the Lifetime ISA
- You use a conveyancer or solicitor to complete the purchase – the funds will be paid directly to them by the ISA provider.
If you are buying the property with someone else, you are free to use your combined Lifetime ISA savings, as long as all of the above applies to you both.
If you have a Help to Buy ISA as well as a Lifetime ISA, you can only use the government bonus from one of these accounts to fund the purchase. You can transfer money from a Help to Buy ISA to a Lifetime ISA – but if you try to do the opposite and move money from a Lifetime ISA to a Help to Buy ISA, there is a considerable withdrawal penalty, as detailed below.
Retirement
If there is money still in the account when you turn 60, it can be withdrawn to supplement retirement income.
The only other reason you are allowed to withdraw savings from a LISA is if you are terminally ill, and have been given less than 12 months to live.
What is the penalty for early withdrawals from a Lifetime ISA?
If you withdraw the money from your Lifetime ISA in any other circumstance you must pay a 25% exit fee on your savings. For example, if you put in £800 and received a £200 top-up from the government, then decided to withdraw the full £1,000, you would have to pay £250 in penalties, leaving you with just £750.
Can I take out a Lifetime ISA for someone else?
Unfortunately, you cannot open a Lifetime ISA for someone else – only the account holder can open and manage their account. This means that you won’t be able to open an account on behalf of a child or grandchild, for example.
However, you may choose to gift them the money on the recommendation that they save it into a LISA and benefit from the government’s 25% boost.
You can set up most other types of ISA for another person, just not a Lifetime ISA. If you have a younger relative who is under 18, you can set up and start paying into a Junior ISA (JISA) for them, provided you are their legal guardian. They will be able to make withdrawals and deposits themselves once they turn 18. Learn more about opening an ISA on someone else’s behalf and Junior ISAs in our article Can you open an ISA for someone else?
You could also consider setting up a trust for a younger relative. This is where you hold onto or invest a portion of money until they reach a certain age, at which stage control of the funds is transferred to them. Read more about how trusts work and how to arrange one in our article What is a trust and how do I set one up?
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