By Chiara Cavaglieri
How to open the new tax-free lifetime Isa for under 40s and earn as much as £32,000 in free cash from the government.
The lifetime Isa is a new tax-free savings or investments account designed to help under 40s buy their first home or save for retirement.
Announced in the 2016 Budget, it will be available for those aged 18-39 from April 2017.
It is the latest member of the Isa family, joining cash Isas, stocks and shares Isas, junior Isas, Help to Buy Isas and innovative finance Isas in an increasingly complex landscape for savers.
Here, we'll explain what you need to know in order to take advantage of your options. Jump to:
- Lifetime Isa: at a glance
- Opening a lifetime Isa
- Paying into a lifetime Isa
- Withdrawing money from a lifetime Isa
- Transferring a lifetime Isa
- Should I use a Help to Buy Isa or lifetime Isa?
- Details yet to be finalised
- Providers launching lifetime Isas
The lifetime Isa: at a glance
When is it available? 6 April 2017
Who can open a lifetime Isa? Adults aged 18-39 (if you turn 40 on or before 6 April 2017 you won't be eligible)
What do I get? For every £4 you save, the government will add £1 (worth up to £1,000 every tax year until you turn 50 years old).
How much can I save? Up to £4,000 a year is eligible for the 25% bonus (you can add more but it won’t receive a government contribution).
When is the bonus paid? In the first year it will be paid annually, but from the 2018/19 tax year onwards the bonus is paid every month, so that you benefit from compound growth.
Can I invest in stocks and shares? Yes, you can invest in either cash or stocks and shares.
Does this sit within my overall Isa limit? Yes, your overall annual Isa limit will be £20,000 in 2017/18 for all payments into a cash Isa, stocks and shares Isa, innovative finance Isa, or lifetime Isa.
Can I spend the money on whatever I like? Under the age of 60 – no, you must use the cash to purchase a first property worth up to £450,000. After age 60 – yes, you can spend the money as you see fit.
Are withdrawals tax-free? Yes, as with other Isas, withdrawals are tax-free.
Are withdrawals penalty-free? It depends – if you use the money to purchase a first property, or withdraw after the age of 60, you won’t be charged. If you want to spend the money on anything other than your first property and you’re under the age of 60, you’ll be hit with a 25% penalty, although this will only take effect from April 2018.
Can I pass on my lifetime Isa to a partner? Yes, your spouse or civil partner can inherit the value of your lifetime Isa as an ‘additional permitted subscription’ (APS) allowance. For more on how to pass on an Isa, see our guide to inheritance Isas.
Opening a lifetime Isa
As with a regular Isa, you will be able to hold multiple lifetime Isas at one time, however, you can only open and pay into one lifetime Isa in each tax year.
You can transfer money from existing Isas and any money you move across from previous years’ Isas will not affect your overall Isa limit for that year.
Paying into a lifetime Isa
If you open a lifetime Isa you can still have a regular cash Isa, a stocks and shares Isa and an innovative finance Isa – as long as your overall contributions are within the annual Isa limit. This limit will increase to £20,000 from April 2017.
As with all other Isas, your money grows tax-free.
Parents and grandparents can also pay into a lifetime Isa opened by their child or grandchild, which could be a useful part of inheritance tax planning.
If you save the maximum £4,000 a year from age 18-50 you would receive £32,000 in government bonuses over the 32 years.
The bonus is paid on your contributions, not the overall amount saved. So, it doesn't matter what interest rate you earn if you open a cash lifetime Isa, or how your investment performs if you open stocks and shares lifetime Isa, as the bonus is paid on what you put in.
Withdrawing money from a lifetime Isa
You can put your lifetime Isa savings and bonuses towards a deposit on your first property or to fund retirement, although you won’t be benefit from employer contributions as you would if you have a company pension.
A lifetime Isa for retirement
Once you hit age 60 you can withdraw some, or all of your money, including the government bonus, to spend as you see fit.
Withdrawals are tax-free.
A lifetime Isa for first-time buyers
You can withdraw some, or all, of your money at any time after 12 months of opening the account – as long as you are using it to buy your first home, and not a buy-to-let property, in the UK (valued up to £450,000).
Withdrawals are tax-free.
Lifetime Isas are limited per person, not per home, so if you’re part of a couple you can both open a lifetime Isa and benefit from the government bonuses before buying a property together.
Unlike a Help to Buy Isa, you can use both your lifetime Isa savings and the government bonus to put down a deposit once you’ve exchanged contracts. The Help to Buy Isa only pays the bonus after completion, so it can't be used as part of your initial deposit to secure the property.
If the purchase falls through, or you don’t use the cash to buy your home within three months after the withdrawal, the money must be returned to the lifetime Isa by the conveyancer.
If you withdraw money for any other reason, you will face a 25% penalty on the amount withdrawn.
So, if you're under 60, and do not intend to use it to purchase property, you must return the bonus, plus any interest or growth on that bonus, and pay a small fee (5%).
The only exception to this is if you're diagnosed with terminal ill health, in which case you can withdraw all of the funds (including the bonus) tax-free and penalty-free, regardless of age.
However, this penalty will only come into effect in April 2018, to avoid anyone being charged before they've received the government bonus.
Between April 2017 and April 2018, if you need to withdraw money you must fully close your lifetime Isa and you will not receive any government bonus at the end of the tax year (with the exception of withdrawals for death and terminal illness).
After closing the original account, you will have the opportunity to open another lifetime Isa before the end of the 2018 tax year, and make full use of the £4,000 annual payment limit in that year.
Transferring a lifetime Isa
You will be able to transfer your lifetime Isa between providers. This should take no longer than 30 days.
It will also be possible to move money from a lifetime Isa to another type of Isa, however, this will count as a chargeable withdrawal so you will have to pay the 25% penalty.
Should I use a Help to Buy Isa or a lifetime Isa?
Help to Buy Isas will still be available until 30 November 2019, so the big question for many savers will be whether or not they should continue to use a Help to Buy Isa, or switch to a lifetime Isa.
During the 2017/18 tax year, anyone with an existing Help to Buy Isa will be able to transfer their current savings (as of 5 April 2017) across to a new lifetime Isa, without these funds counting towards their savings limit for the tax year.
With a limit of £4,000 a year, compared to the £2,400 (or £3,400 in the first year) offered by a Help to Buy Isa, transferring your money to a lifetime Isa might seem like a no brainer - but that isn’t always the case.
Whether you’ve currently got a Help to Buy Isa or are simply wondering which account to open, the best product for you largely depends on when you’re planning to buy your first home.
If you intend to buy a home before April 2018
If you’re on the verge of buying your first home, it's best to go for a Help to Buy Isa. While bigger deposits are allowed in the lifetime Isa, you’re not allowed to withdraw them and redeem your bonus until you’ve had the account for a year, meaning your savings will be locked in.
Lifetime Isa bonuses will be paid monthly from April 2018 onwards.
The Help to Buy Isa is also much more accessible for buyers aiming to move quickly. To get the minimum bonus of £400, you only need to have saved £1,600 - and this can be achieved within three months of opening the account (if you pay the maximum £1,200 in the first month and then £200 in each of the following months).
If you’re planning to buy a home in a few years
If you’re saving to buy a home further down the line, you’re better off opening a lifetime Isa, as you can save more money and get a bigger bonus when you come to cash in your savings.
You’re also not limited by a monthly deposit cap - with the Help to Buy Isa you can only save £200 per month, but with the lifetime Isa you can add cash as a lump sum.
A lifetime Isa bonuses can be used towards more expensive properties. With the Help to Buy Isa, you can only buy a house worth up to £250,000 (or £450,000 in London), while the lifetime Isa allows you to buy a home worth up to £450,000 anywhere in the UK.
This limit provides more protection against rising housing prices for longer-term savers.
Can I have both a Help to Buy Isa and a lifetime Isa?
You can also choose to open a lifetime Isa alongside a Help to Buy Isa. However, you can only use the government bonus from one of these accounts to buy your first home.
During the 2017/18 tax year, anyone with a Help to Buy Isa will be able to transfer their savings (as of 5 April 2017) across to a lifetime Isa and still save an additional £4,000.
You will still be able to transfer any money added to your Help to Buy Isa after 6 April 2017, but this will count against the lifetime Isa contribution limit for that year.
Details yet to be finalised
The government is yet to decide whether money held within a lifetime Isa can be withdrawn without charge for other specific life events, in addition to buying a first home.
It's also debating whether you can borrow funds against your lifetime Isa without incurring a charge, as long as you repay the money in full.
However, the Treasury has confirmed that these will not be a feature when the lifetime Isa first becomes available in April 2017.
Further details will be announced in the Autumn Statement.
Will providers be ready to launch lifetime Isas?
No – it appears that, as of March 2017, most providers aren't ready to offer a lifetime Isa yet. None of the banks or building societies Which? Money spoke to can confirm their commitment yet.
Stocks and shares Isa providers are much keener to jump on board. Three firms have said they will be ready to offer the investment version of the lifetime Isa on 6 April 2017 (Hargreaves Lansdown, Nutmeg and The Share Centre), and others are planning to launch theirs later in the tax year.
We've created the table below to keep you up to date on the providers offering lifetime Isas:
- Last updated: March 2017
- Updated by: Chiara Cavaglieri