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    What is a Lifetime ISA?

    By The reallymoving Team Updated 26th Mar, 2024

    One of the government schemes to help people save for a deposit is the Lifetime ISA. This ISA is designed for First Time Buyers looking to save towards buying their first home.

    What is a Lifetime ISA?

    Announced by George Osborne in the 2016 budget, the Lifetime ISA is a special savings account that offers under-40s the opportunity to save over £33,000.

    Opening a Lifetime ISA is a great option for potential First Time Buyers, as you can save up to £4,000 a year and receive a 25% state bonus on top of these savings.

    Opening a Lifetime ISA

    To be eligible for the Lifetime ISA scheme, you must:
    • Be over the age of 18 and under the age of 40.
    • Be a UK resident or a member of the armed forces serving overseas (or their partner)
    The Lifetime ISA offers two options for savers; either to help you save for your first home, or to build up a nest egg for retirement. You can also do both.

    The Lifetime ISA account is tax-free and can take the form of cash savings or stocks and shares investing.
    Each individual is entitled to open a Lifetime ISA, which means for couples looking to buy a property together, both of you can open an account and start saving. You can also open more than one Lifetime ISA in the course of your life, but you can only open and contribute to 1 per tax year.

    Paying in

    Though you can’t open a Lifetime ISA after you turn 40, if you have an account open, you can continue to pay into it until you are 50. This is especially useful if you are utilising it for a retirement nest egg.

    You can deposit up to £4,000 into a Lifetime ISA in a given tax year. This will count towards your overall annual ISA limit (how much you can pay into all your ISAs combined in a year), which is £20,000 for the 2020-2021 tax year. If you have a Help to Buy ISA open (these are no longer available to new applicants) and wish to transfer your money into your new Lifetime ISA it will count towards these limits.

    Find out more about transferring from a HTB ISA to a Lifetime ISA.

    When you pay in to your account, each month the government will add a 25% bonus to whatever you paid in. So, if you paid in the full £4,000, the government would give you £1,000 that year. This money will be paid in tax free. If the money is transferred in from another ISA, it will still receive this bonus. Any bonus paid in does not, however, include investment interest or investment growth.

    You don’t need to manually claim the bonus in any way, it will automatically be paid into your ISA monthly. Even if you withdraw some of the money you paid in before receiving the bonus, your bonus will still include it.

    However, you will face withdrawal fees of 25% if you are withdrawing for a reason other than buying a home or retiring, so this will impact your net savings.

    Withdrawing the deposit/savings

    Unlike a regular ISA, there are only three circumstances in which you are allowed to withdraw money from your Lifetime ISA:
    • To purchase your first home
    • After the age of 60
    • If you have a terminal illness
    If you withdraw money for any other reason, you will be subjected to withdrawal charges.

    If you close the account within 30 days of opening it, you will not be charged for withdrawal, however you will also not receive the 25% bonus or interest on what you paid in.

    Restrictions on using a LISA as a First Time Buyer

    To use the Lifetime ISA towards buying a home, you MUST be a First Time Buyer and you MUST have opened the ISA at least 12 months before withdrawing money for a deposit.

    There are also restrictions on the type of home you can buy with a Lifetime ISA. It must:
    • Be in the UK
    • Be up to £450,000 and no more
    • Be the only home you intend to own
    • Be the home you intend to live in
    • Be purchased with a mortgage
    It’s always good to check with your conveyancing solicitor whether the property you wish to purchase meets all the conditions.

    How to access the funds for your property

    You can access the funds by filling out a form from the bank or building society that explains you want to use your LISA funds to by a property. You will fill in the details of your conveyancing solicitor, as they will be handling the funds during the transaction. You also decide if you want to keep your LISA open so you can continue saving, how much you want to use from your savings, or if you want to close the account completely.

    When the time comes for your funds to be transferred, the building society/bank will contact you directly to confirm that you are happy for the money to be transferred to your solicitor.

    There is no requirement for which deposit you can use the money from your Lifetime ISA towards, as you can receive the bonus before completion of your property purchase. However, there is a requirement if you choose to use it towards the exchange deposit. The exchange MUST be completed within 90 days of you withdrawing the money and giving it to your conveyancer. If the exchange is taking longer than this (as is sometime out of your control), your conveyancer can ask HMRC for an extension on your behalf.

    According to the governments Lifetime ISA withdrawal guidance, if the purchase of your property falls through after you have withdrawn money from your Lifetime ISA for the deposit, your solicitor must immediately return that money to your ISA in full. If this does not happen you should contact HMRC as per the guidance.

    Buying a home with someone else

    As we previously stated, you can purchase a home with someone else, for example a partner or spouse, using both your Lifetime ISAs. However, even in this case, the home you purchase must still meet all these conditions. If the person you are buying with has a Lifetime ISA but is not a First Time Buyer, they cannot put their ISA towards the property with you.

    As long as it meets these conditions, you may also use the Lifetime ISA to build property or purchase land to live on.

    You may be able to use money from your Lifetime ISA along with other government schemes in order to buy your home. One notable exception is the Help to Buy ISA. If you have both ISAs open, you can only use funds from one of them to purchase your first home. This is why it may be worth transferring funds and consolidating the two.

    Withdrawing for retirement or death

    Though you can deposit into your ISA up to the age of 50, you cannot withdraw from it charge-free for retirement until you are 60 years old. After this, you can put the money towards anything you wish for your retirement. Be aware that, you also do not receive the 25% bonus after this point.

    You may be able to keep your funds as investments, which will continue to add interest and investment growth tax free. You can also move the funds to a different kind of ISA. You can remove the funds as a lump sum, or dip into them as and when.

    If you find out you have less than 12 months to live, you can withdraw money from your Lifetime ISA without any charges. You will still receive the 25% bonus on these funds.

    If you die with a Lifetime ISA open, that money will become part of your estate. There will not be a charge for anyone withdrawing from the ISA at this stage because it will have been integrated into the rest of your estate so will no longer be considered a Lifetime ISA. Your next of kin can claim the government bonus made into the Lifetime ISA on or before the date you died. However, your estate can only receive the bonus once the Lifetime ISA has been closed.
    For further information on the Lifetime ISA, you can visit the UK government’s Lifetime ISA page. You can also use this to find information on other government schemes and ISAs for saving.

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