I recently asked a young newly married colleague of mine whose wife is expecting their first baby, if he had another female friend. He looked a little puzzled and worried about the question. I then asked him if her name was LISA. I quickly put him out of his confusion by explaining that I was referring to the acronym LISA which of course stands for Lifetime ISA. As it turned out he did have a LISA though he hasn’t yet saved much money into it.

Lifetime ISAs (also known as LISAs) are a type of ISA created to help people aged between 18 to 40 years save for their first home or retirement. If you take out a Lifetime ISA, the government will give you a bonus worth 25% of what you pay in, up to a set limit, every tax year.

How does a Lifetime ISA work?

If you’re buying a home with someone else, you can both take advantage of separate Lifetime ISAs.

  • You can put a maximum of £4,000 into a Lifetime ISA each tax year until you’re 50.
  • You are paid a 25% bonus from the government. The bonus will be paid monthly if subscriptions are made monthly, annually if subscriptions are made annually, or 4-8 weeks after any ad-hoc subscription is made.
  • The maximum bonus you can earn in a tax year is £1,000.
  • The amount you pay in is linked to your annual ISA allowance (£20,000 for 2021/22). For example, if you pay £1,000 into your Lifetime ISA, you can still pay £19,000 into other ISA products.
  • You can subscribe to a Lifetime ISA, a cash ISA, a stocks and shares ISA and an innovative finance ISA in each tax year.

The sting in the tail is that if you do not use your LISA to buy a first property or to use it as a retirement fund when you reach age 60, a withdrawal penalty will apply when any funds are removed from the LISA.

When can you access your money?

You can access money in your Lifetime ISA, including the government bonus and without paying any tax if:

  • you reach the age of 60
  • you are diagnosed with a terminal illness
  • you’re buying your first home and your account has been open for 12 months.

Taking money out of your Lifetime ISA

You’ll pay a withdrawal charge if you take money out for any reason other than the three mentioned above.
The charge is usually 25% of the amount withdrawn.
This is worked out after your bonus is paid.

So if you get a bonus, and had subscribed £1,000 to your LISA, you’d have a total of £1,250 that you could take out. The 25% penalty charge is £312.50, so you’d only get £937.50 in your pocket, meaning you’d lose some of your savings and get back less than you invested.

That’s why a Lifetime ISA is only really suitable if you want to use it to help buy your first home, or to save long-term for retirement.

Buying a property

The good news is that a couple can combine their LISA savings to buy a property.

If you want to use a Lifetime ISA to buy a home, there are a few restrictions you need to keep in mind:

  • only first-time buyers can use Lifetime ISAs to buy a home. That means you can’t own or have owned, a home in the UK or anywhere in the world
  • you will need to be buying a home for no more than £450,000
  • you must be buying a home you plan to live in. The scheme is not for buying a home you want to rent out, or a holiday home
  • you must use a residential mortgage.

I firmly believe that buying a home is one of the best steps a young person or couple can take to building future wealth alongside joining a workplace pension scheme. Joining a workplace pension scheme is a no-brainer because you usually benefit from free employer pension contributions which are a tax-free benefit in kind. Save into pensions throughout your career and you will most likely end up with a large pension pot to fund your retirement.

Bearing in mind that the average person in the UK spends a third of their income on rent or mortgage payments monthly it makes sense to buy a property as early as possible depending on your circumstances. As you have to pay rent anyway why not consider buying a property instead.

Your mortgage will usually only last for 25 years at most whereas rent is payable for the rest of your life. Furthermore, rent will increase year by year whereas mortgage payments will fluctuate up and down. You are highly likely to pay more in rent for 25 years than in mortgage payments and, when buying a home, once this period has ended you own an asset, your house, outright.

So if you are young and saving to buy a house do give LISAs serious consideration.* You know it makes sense.

* Your property may be repossessed if you do not keep up repayments on your mortgage. Past performance is not a guide to future performance and the value of your investments can fall as well as rise and is not guaranteed. The contents of this blog are for information purposes only and do not constitute individual advice. All information contained in this article is based on our current understanding of taxation, legislation and regulations in the current tax year. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future.