Lifetime ISA: Bonus on Savings for a Home or Retirement

If you’re age 18 to 40, you can open a lifetime ISA (individual savings account) and earn a 25% annual bonus on up to £4,000 in savings until you reach age 50.

John Fitzsimons Published on 03 December 2020. Last updated on 20 January 2021.

If you are looking to purchase your first property, then a big challenge is likely to be putting together a sufficient deposit. According to the Office for National Statistics, the average property is worth £232,000 (May 2020). That means you’ll need more than £23,000 to put a 10% deposit on the typical home.

One way to make that process a little easier is to take advantage of bonuses that come from saving with a Lifetime ISA.

» MORE: How much do I need for a house deposit?

What is a Lifetime ISA?

The Lifetime ISA is a form of tax-free savings account introduced by the government in April 2017.

It is designed to help people looking to do one of two distinct things: saving for their first home, or saving for later life. On top of the interest paid by your account provider, you will also receive an annual bonus from the government of 25% each year until you reach the age of 50.

How much can I save in a Lifetime ISA?

Savers cannot put more than £4,000 a year into their Lifetime ISA. As a result, the 25% government bonus amounts to a maximum of £1,000 each year.

Everyone in the UK has an annual ISA allowance. For the current tax year (2020/21), that allowance stands at £20,000.

The Lifetime ISA limit counts toward that overall ISA limit, so while you can save up to £4,000 a year in the Lifetime ISA, you can save a further £16,000 each year in other forms of ISA such as a cash ISA or stocks & shares ISA.

Who can open a Lifetime ISA?

In order to open a Lifetime ISA, you must be at least 18 years old. The account must also be opened before you turn 40 years old, however the bonus is potentially payable until you reach age 50.

Where can I get a Lifetime ISA?

A host of different banks and building societies offer Lifetime ISAs.

Importantly, they come in a couple of different forms, too. Some are cash Lifetime ISAs that operate much like an ordinary savings account, where you are paid a set rate of interest by the provider. The government bonus is then paid on top.

With others, the money you put into the account is instead invested in the stock market. These are obviously riskier as there is the potential that your investments fall in value, and you end up with less than you put in.

As a result, it’s important to carefully consider precisely where your money will be invested and how quickly you will need to access your money before opening a stocks and shares Lifetime ISA. This option may therefore be more relevant to people who are using their Lifetime ISA to save for retirement because they have a much longer investment horizon and the potential to ride out short-term losses.

How can I open a Lifetime ISA?

You will need to open the Lifetime ISA directly with the account provider.

Alongside personal information like your name, address and date of birth, you will also need to supply your national insurance number.

Withdrawing money from a Lifetime ISA

The Lifetime ISA is designed to help people purchasing their first home or who want to save for their retirement outside of a pension.

As a result, there will be no charges for withdrawing cash or assets from your Lifetime ISA in order to help you buy a property or if you are 60 or older. There will also be no charge if you make a withdrawal and are terminally ill, with less than 12 months to live.

However, in all other situations there will be a withdrawal charge. This usually stands at 25% but has been reduced to 20% until 5 April 2021 to help those affected by the coronavirus pandemic.

What sort of property can I buy using a Lifetime ISA?

There are rules covering the type of property you can purchase using the money saved in your Lifetime ISA. It needs to be a property you intend to live in, rather than a buy-to-let property.

The property also needs to be valued at less than £450,000.

Can I have two Lifetime ISAs?

You can only open and contribute to a single Lifetime ISA in each tax year. However, as with other forms of ISA, you can have more than one Lifetime ISA in your name.

For example, you could have opened a Lifetime ISA and paid into it in the 2019/20 tax year. You can then open a new Lifetime ISA with a different provider in the 2020/21 tax year. However, you can only pay into one of them.

You can also purchase a property with somebody else who is using one.

For example if you are buying with your partner, you can both open Lifetime ISAs separately and enjoy twice the government bonuses on your savings, helping you build a sizeable deposit between you more quickly.

About the author:

John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more

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