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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. 

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.

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. 

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. 

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.

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.

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. 

You can transfer money in your Help to Buy Isa to a lifetime Isa, but this will count against the lifetime Isa contribution limit for that year.

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.

Skipton offers the first and only online cash liftetime Isa. It currently has 0.75% tax-free interest, which is earned daily and paid annually on the anniversary of the account being opened. 

The account can only be opened and managed online, and the first payment into the account must be by debit card, internal transfer from another Skipton account, or transfer (but not direct debit) from another bank or building society. 

You can also transfer Isa savings. After that, you can pay by cash in branch, cheque or standing order. 

You can deposit anything between £1 and £4,000 each tax year, and there’s an offer to receive £250 cashback on a Skipton mortgage when you take out an online cash lifetime Isa.

No joint accounts are allowed.

The Share Centre has a Ready-made Lifetime Isa, where you can choose for your money to be invested into one of its three funds: ‘cautious’, ‘positive’ or ‘adventurous’, depending on your attitude to risk. The three funds can also be blended. 

The funds include a wide variety of investments to make them as diverse as possible, but you can’t choose specifically what is included in each fund. 

Due to the nature of investments, there are risks involved with all fund options – even if you go for the ‘cautious’ option there is still the chance that you will get back less money than you initially invested. 

On opening a lifetime Isa, there are no dealing commission fees, no account admin fee or initial charges. 

There are, however, ongoing fund charges for managing the investment. These are set at 1.75% of your savings and are taken directly from your account. This means those with small investment amounts may be negatively affected. 

You can pay into the account by debit card, cheque or Bacs/Chaps, and you can also set up a direct debit.

Nutmeg is a finance app/'robo advisor' that allows you to manage your investment portfolio through your phone. 

With its lifetime Isa, your funds are invested in stocks and shares (mostly exchange-traded funds). Nutmeg helps you choose a portfolio based on your finance goals and attitude to risk. 

Each portfolio is diversified across different assets, countries and industry sectors. There are two option:

  • a fully managed portfolio, which is managed by the investment team and incurs a larger fee (0.75% up to £100k, 0.35% beyond);
  • or a fixed allocation portfolio which is cheaper to maintain (0.45% up to £100k, 0.25% beyond) but has no ongoing management. 

There are also charges for investment fund costs and effect of market spread, which can vary. 

All fees are taken directly from your account on a monthly basis. The minimum investment is set at £100. 

As with all investments, there are risks involved, so you may get back less money than you put in. 

The option to transfer money held in other Isas to your Lifetime Isa is not yet available with Nutmeg – this includes the transfer of a Help to Buy Isa.

Hargreaves Lansdown offers a stocks & shares lifetime Isa. You can open with a lump sum of £100 or start saving from £25 a month, and then choose your investments. 

There are several investments to choose from, based on how long you’re planning to invest for and your attitude to risk. 

You can manage your account through Hargreaves Lansdown’s app. 

There are annual management charges for holding your funds:

  • 0.45% on the first £250,000;
  • 0.25% for funds between £250,000 and £1m; 
  • 0.1% for funds between £1m and £2m; 
  • no charge for funds over £2m. 

There may also be dealing charges for online and mobile app share dealing, telephone and postal share dealing, and income reinvestment. 

Fees are taken monthly from your account. There is a ‘suggested minimum cash balance’ to prevent the chance of not having enough money in your account to cover the fees. 

If that happens, you can add money to a Fund & Share Account, where fees will be collected if there aren’t enough in the Lifetime Isa. 

If there is not enough money in the Fund & Shares account, Hargreaves Lansdown will sell sufficient holdings to cover the amount owed, at a charge of £1.50 per deal if an automatic sale is required. 

If you are unsure where to invest or with to be out of the market, cash can be held in the lifetime Isa. There are no inactivity fees, and funds from £5,000 upwards received 0.05% interest. 

As your funds are being invested, there are risks involved and you could end up with less money than you put in.

MoneyBox is an app-based investment platform, with a stocks & shares lifetime Isa that invests money via three tracker funds. 

These are split into ‘cautious’, ‘balanced’ and ‘adventurous’, each with a portfolio including a cash fund, global shares fund and property shares fund. 

You must pay a subscription fee of £1 per month to use the app, plus a platform fee of 0.45% of what you invest per year. Plus there are fees from fund providers, ranging from 0.22% to 0.24% of your investment. 

You are able to transfer existing Isas (including Help to Buy Isas) into a MoneyBox Lifetime Isa, and will soon be able to transfer a MoneyBox stocks & shares Isa into a MoneyBox Lifetime Isa. 

If you transfer your MoneyBox Lifetime Isa to an alternative lifetime Isa, you will be charged a £25 administration fee. 

There is an element of risk involved when investing money, and you may get back less than you initially put in.

AJ Bell is an investment company offering a stocks & shares lifetime Isa.

Investment options include shares, investment trusts, unit trusts, gilts, corporate bonds and Open Ended Investment Companies (OEICs). You cannot invest in warrants or private (unquoted) shares.

There's a range of investment tools, including videos, articles and research, on its website to help you decide what's right for you.

Alternatively, there's the option to invest in AJ Bell Passive funds (charged at 0.5% annually) - managed by a team of investment experts with five categories based on how adventurous an investor you are. 

Fees vary according to types of investment, with a custody charge of 0.25% on shares and funds, a charge per deal on buying and selling investments ranging from £1.50 for funds and regular investments online, to £100 where a paper application is required.

There are also charges for payments by CHAPS (£25 plus VAT), transferring out underlying assets (£25 per holding), and disinvestment - i.e. if your holdings have to be sold to cover charges (£29.95 per holding).

You can transfer cash from stocks & shares and cash Isas, as well as an existing lifetime Isa and Help to Buy Isa.

There's a mobile app, where you can access your account at any time and deal on the go.

As returns on investments are not guaranteed, you could end up with less money than you first put in.

Foresters Friendly Society is a mutual society that offers a stocks & shares lifetime Isa. 

Money is invested in the With Profits Order Insurance Fund, which aims to provide growth over five years or more. Annual and final bonuses may be added to the lifetime Isa by Foresters, depending on how much profit the fund makes - this isn't guaranteed.

The lifetime Isa is classified as 'medium risk', which Foresters classes as 'one which typically cannot predict the amount of money you may receive back'.

You can transfer money in from other Isas and savings.

A Market Value Reduction (MVR) may apply when you make withdrawals or fully cash in your lifetime Isa, even if you are over 60 or using the money to buy your first home.

Charges include an annual management charge of 1.25% and portfolio transaction costs of 0.12%.

It also offers 'Foresters Extras', as opening the account makes you a Foresters member. These include financial grants for education and healthcare, social and community events and Foresters Care - practical and emotional support from a personal nurse advisor for anyone with a serious medical condition.

The latest stocks & shares lifetime Isa to launch, OneFamily offers two investment fund options with varying levels of risk. 

The Global Equity Fund is for those looking to invest for over 10 years (so probably not first-time buyers), who are willing to accept a greater risk in the hope of greater overall returns in the long run. 

The Global Mixed Investment Fund is suitable for those planning to invest for at least five years, with shorter term goals. It’s less risky, so potential return are lower. 

Both funds invest almost exclusively in collective investment schemes. As markets can fluctuate, there’s no guarantee that you’ll get back the same value of money you initially invested. 

There’s a 1% annual management charge, plus you’ll have to pay up to 0.3% for an investment expenses charge. 

To open the account, you need to either set up a £25 direct debit, or deposit a £250 lump sum. 

Payments can only be made via debit card (made online) or from a regular Direct Debit from a UK bank or building society held in your name.