What is a lifetime Isa?
The lifetime Isa is a new tax-free savings or investments account designed to help those aged 18-39 buy their first home or save for retirement.
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.
Our short video explains how lifetime Isas work.
How does a lifetime Isa work?
When is it available? It's been available since 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) – as long as they have never owned property before
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? 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 2018/19 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.
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.
How do I open 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.
How much can I pay 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 – as long as your overall contributions are within the annual Isa limit (£20,000 for 2018-19 tax year).
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.
Can I withdraw 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.
But you won’t be able benefit from employer contributions as you would if you have a company pension.
Here, we explain the different ways you can take money out of your lifetime Isa.
Can I transfer 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.
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.
The future of lifetime Isas
The government is debating whether to let people borrow funds against their lifetime Isa without incurring a charge, as long as they repay the money in full.
It may also decide that money within a lifetime Isa can be withdrawn without charge for other specific life events, in addition to buying a first home.
But, neither of these things are possible right now.
Lifetime Isa providers and what they offer
There are currently eight Lifetime Isa providers on the market, offering either cash or stocks and shares investment options.