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What are the advantages of the new Lifetime ISA?

  1. 19 April 2016
  2. By Rosie Rogers

As part of his Budget a few weeks ago – which will now most definitely be remembered for things other than housing – the Chancellor George Osborne announced the launch of a new Lifetime ISA to help encourage young people to save for both their first home and their retirement.

It will be coming into play in April 2017, with anyone aged between 18 and 40 eligible. Savers will be able to save up to £4,000 a year and will receive a bonus of 25% from the government, worth up to £1,000, at the end of each tax year. The yearly bonus will be paid until the age of 50.

How will it help first-time buyers?

Well, those wanting to use the Lifetime ISA to fund their first home will be allowed to put the money towards a deposit on any property worth up to £450,000. 

Two people can use separate Lifetime ISAs to purchase one property, which will improve the chances of couples dipping their toes into the property market for the first time. 

In other words, both members of a couple can take out a Lifetime ISA and both can benefit from the government bonuses before purchasing a home together.    

What about the Help to Buy ISA?

Those who already have a Help to Buy ISA – another of the government's flagship schemes to help first-time buyers onto the property ladder – will be able to transfer their money into a Lifetime ISA from next April. 

They can also choose to keep paying into both, but they will only be able to use the bonus from one to purchase a property.

The Help to Buy ISA is slightly less generous than the Lifetime ISA and is set to end in November 2019, so first-time buyers thinking more long-term might see the Lifetime ISA as a better option.

Does the Lifetime ISA offer any other benefits?

Another advantage of the Lifetime ISA is that you can withdraw money from it any time, while Osborne has promised that no tax will be paid on the savings in it. Withdrawals are also tax-free.

At a time when saving for deposits is more difficult – thanks to ultra-low interest rates – the Lifetime ISA represents one way of encouraging younger people to save, with the incentive being that for every £4 saved, the government will add £1. 

People can put as much or as little into the ISA as they want and savers will only be hit with penalties if they intend to withdraw the money and spend it on non-property related things.   

Are you allowed other ISAs?

As well as a Help to Buy ISA and a Lifetime ISA, first-time buyers can still have other ISAs as well – such as a regular cash ISA, a stocks and shares ISA and an innovative finance ISA – so long as they don't exceed the annual ISA limit. 

Osborne confirmed in his latest Budget that the ISA allowance will increase from £15,240 a year to £20,000 in April 2017. 

The Lifetime ISA isn't an instant solution for first-time buyers to get on the property ladder, but it will aid that goal. 

And, when coupled with the Help to Buy ISA and the other ISAs available, first-time buyers are being given more avenues through which to raise the deposits they need for that first home. 

The number of schemes targeted specifically at first-time buyers is also going up – and only likely to expand further in the next few years – so those looking to get on the ladder for the first time can start to think that the distant pipe dream of owning their own home might have much more chance of becoming a reality. 


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