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Budget 2016: Lifetime Isas

A new tax-free savings vehicle for under 40s

Money purse

A new tax-free savings vehicle for under 40s will be introduced from 6 April 2017, helping young people buy their first home or save for retirement, it was announced in today’s Budget.

The ‘Lifetime Isa’ can be opened by any adult aged between 18 and 39. Savers can put away up to £4,000 each year with an additional 25% bonus from the government paid up to your 50th birthday.

How will the Lifetime Isa work?

You can save any amount each month, up to a maximum of £4,000 per year, and you’ll get a government bonus of £1 for every £4 saved.

The bonus will be paid into the Lifetime Isa at the end of each tax year. As with a regular Isa, your money grows tax-free.

If you open a Lifetime Isa you can still open 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.

You can put your Lifetime Isa savings and the bonus towards a deposit on your first property, or to fund retirement.

Accounts are limited to one per person, not per home, so two first-time buyers buying together can both receive a government bonus.

  • If you want to use your Lifetime Isa to buy your first home (valued up to £450,000 nationally) you can do so at any time from 12 months after opening the account.
  • Once you hit age 60 you can withdraw all the cash, including the government bonus, for any other purpose.
  • If you withdraw the money before you reach 60, but don’t use it to buy a property, you’ll have to pay a 5% charge and won’t get the government bonus.

How do I open a Lifetime Isa?

As with a regular Isa, you will be able to open a Lifetime Isa with a bank, building society or investment manager.

You can invest in stocks and shares or cash and can open more than one Lifetime Isa during your lifetime, but you can only 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.

What about Help to Buy Isas?

Help to Buy Isas will still be available until November 2019.

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 any savings built up into the Lifetime Isa and still save an additional £4,000.

Can I access my money?

Yes, 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 in the UK.

If you’re under 60 and do not intend to use it to purchase property there will be a 5% charge applied and the bonus, plus any interest or growth on that bonus, will be returned to the government.

The only exception to this is if you are diagnosed with terminal ill health, in which case you can withdraw all of the funds (including the bonus) tax-free, regardless of age.

Can my partner inherit my Lifetime Isa?

The Lifetime Isa will be treated in the same way as other Isas for inheritance tax purposes.

That means the funds will form part of the estate, however, spouses and civil partner can inherit each other’s Isa tax allowances. We explain the rules for inheriting an Isa in this guide.

Details yet to be finalised

The government has yet to decide whether money held within a Lifetime Isa can be withdrawn in full for other specific life events, in addition to buying a first home.

It will also confirm later whether savers can borrow funds against the Lifetime Isa without incurring a charge, as long as you repay the money in full.

Further details will be announced in the autumn.

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Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms & conditions of a provider before committing to any financial products.

Categories: Money, Savings & Isas

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