Lifetime ISA’s – buying your first home or 25% bonus in retirement?

The Government’s flagship Help to Buy ISA scheme was scrapped by ministers earlier this year, following fears it was giving handouts to just the middle classes and pushing up house prices. However, potential first-time buyers who missed out on opening a Help to Buy ISA in time need not worry as the Lifetime ISA will remain in place. So how does it work and how can you benefit from it?

 

Lifetime ISA

You can use a Lifetime ISA (Individual Savings Account) to buy your first home or save for later life. You must be 18 or over but under 40 to open a Lifetime ISA.

You can put in up to £4,000 each year, until you’re 50. You must make your first payment into your ISA before you’re 40. It is important to remember the LISA limit of £4,000 will count towards your annual ISA limit of £20,000.

The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.

You can hold cash or stocks and shares in your Lifetime ISA, or have a combination of both.

When you turn 50, you will not be able to pay into your Lifetime ISA or earn the 25% bonus. Your account will stay open and your savings will still earn interest or investment returns. We’ll return to this later.

 

 

Withdrawing money from your Lifetime ISA

You can withdraw money from your ISA if you’re:

  • buying your first home
  • aged 60 or over
  • terminally ill, with less than 12 months to live

You’ll pay a withdrawal charge of 25% if you withdraw cash or assets for any other reason (also known as making an unauthorised withdrawal). This recovers the government bonus you received on your original savings.

 

 

Buying your first home

You can use your savings to help you buy your first home if all the following apply:

  • the property costs £450,000 or less
  • you buy the property at least 12 months after you make your first payment into the Lifetime ISA
  • you use a conveyancer or solicitor to act for you in the purchase – the ISA provider will pay the funds directly to them
  • you’re buying with a mortgage

If the person you’re buying with has a Lifetime ISA, they can use their savings and government bonus too. They’ll pay a 25% withdrawal charge to use their Lifetime ISA savings if they own or have a legal interest in property (for example they’re a beneficiary of a trust that includes property).

 

 

Saving for later life

As mentioned previously, the Lifetime ISA is not solely just for first-time buyers. As well as a 25% bonus when purchasing your first home, a 25% bonus will be given to saver’s who withdraw when they are aged 60 and over.

You can open a LISA between the ages of 18-39 and continue saving into it and benefitting from the 25% bonus until you reach 50. Even if you open your LISA account at age 39, you would still have 10 years to pay in and get your bonus, so if you invested the maximum amount of £4,000 per year and gained a boosted £1,000, you’d have £50,000 – and that’s not including any interest incurred within that time, or any returns you’d get before you could take it out at 60.

And with a stocks and shares LISA, you have the opportunity to invest in stock market assets, rather than in a cash saving scheme.

Stocks and shares are riskier than cash, as the value of your investment can go down as well as up. But the flipside is that your investment has the potential to perform better than a cash deposit. Just remember that, with stocks and shares, nothing is guaranteed.

Once it’s time to withdraw your funds, there’s no tax to pay – unlike a pension, where you must pay tax on 75% of your pot. While it’s not recommended that a Lifetime ISA should replace a pension plan, with proactive financial planning it can work alongside your pension to maximise your income and minimise your tax in retirement.

In a world where everyone is chasing the highest interest rate and best performing portfolios, why wouldn’t you guarantee yourself a 25% bonus in retirement?

 

 

Should you wish to speak to an Independent Financial Adviser, visit www.bee-sure.co.uk or for more information on ISA’s Click Here or Contact Us for a free consultation with Jon.

 

Written by Jon Williams DipFA CeMAP, IFA at Beesure Ltd

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