Ready to save for your first home? Look no further than the Lifetime Individual Savings Account (ISA). Launched on the 6th of April 2017, this tax-free account will give you immense rewards for long-term investments. Besides enjoying incredible returns in the form of interest, benefit from a government bonus of up to 25% per deposit – that’s £1,000 extra each year!
How to Get Started with Your LISA
If you’re looking for a way to save for your first home or your retirement, a Lifetime ISA (LISA) could be the perfect solution for you. In this article, we’ll take you through the steps to get started with your LISA, so you can make the most of this tax-free savings account and reach your financial goals.
Eligibility for a Lifetime ISA
To be eligible for a Lifetime ISA, you must:
- Be between the ages of 18 and 39
- Be a UK resident, a member of the armed forces serving overseas, or their spouse/civil partner
Tax Benefits of the Lifetime ISA
Unlike other ISAs, any interest earned on investments or capital gains made from cash stored in a Lifetime ISA is exempt from taxes. However, be sure to check with the HM Revenue & Customs (HMRC)-authorised providers for further information and conditions when you sign up.
How to Save into a Lifetime ISA
If you open your Lifetime ISA before the age of 40, you can continue to pay into it until just before your 50th birthday. You are permitted to save up to £4,000 in a tax year as long as that amount does not exceed the overall annual limit for all ISAs (currently set at £20,000 for 2022/23).
You can hold stocks and shares or cash in your Lifetime ISA, or have a combination of both. You are able to pay into one Lifetime ISA in each tax year as well as a cash ISA and stocks and shares ISA.
Note that any contribution to a Lifetime ISA counts towards your overall annual ISA limit. You can transfer your Help to Buy ISA into a Lifetime ISA, but it will count towards your £4,000 annual limit.
The Government Bonus added to your LISA
Make the most of your Lifetime ISA with a 25% bonus on each amount you contribute! For example, if you pay the annual ISA allowance of £4,000 annually, then the government will provide an extra £1,000 tax-free lifetime ISA bonus as a reward to supplement your investment.
You will have the option of setting up a direct debit or transferring money monthly. Each year you get interest on lifetime ISAs and will not need to pay tax on your initial savings or the bonus paid.
After receiving this cash incentive from the government, feel free to invest it however you please and benefit from interest or potential growth opportunities!
You don’t even need to lift a finger – your Lifetime ISA manager will take care of claiming the bonus on your behalf. The monthly government bonus is automatically added to your account, regardless if you make any withdrawals or not! Moreover, should there be any withdrawn funds from the account prior to receiving the bonus, they’ll still be credited and paid out either directly into your Lifetme ISA or via other payment methods.
Withdrawing Funds from your LISA
You can withdraw your funds, including the government bonus, without a government charge in any of the following circumstances:
- To help buy a first home worth up to £450,000 at any time from 12 months after you first save into the account
- If you become terminally ill
- From the age of 60
If you close the account within a 30-day cooling-off period, no government charge is payable. You will not receive any government bonus on the money you paid into the account.
Fees and charges for managing a Lifetime ISA may be paid directly to the Lifetime ISA manager from your Lifetime ISA without incurring a government withdrawal charge.
If you withdraw money for any reason other than buying your first home, at age 60, or if you are terminally ill, a charge of 25% will be applied to the amount you wish to withdraw. On death, no withdrawal charge will apply to savings from a Lifetime ISA.
Withdrawing for Your First Home
The Lifetime ISA is only available to first-time home buyers – those who do not own, and have never owned, a property in the UK or elsewhere. To be eligible for the government bonus that comes with this scheme, you must open your account at least 12 months prior to using it towards buying your first residence.
The home you buy must:
- be in the UK
- have a price of £450,000 or less
- be the only home you will own
- be where you intend to live
- be purchased with a mortgage
For those of you buying with another first-time purchaser, both bonuses are available to be used on the purchase of your new home. However, the maximum value must not exceed £450 000. Even if your co-buyer has already owned a property before, their bonus cannot be utilised; though yours can certainly still go towards partaking in this wonderful opportunity!
You can use your Lifetime ISA with other government schemes as long as you meet the eligibility requirements of the other schemes you wish to participate in.
You can use the Lifetime ISA to buy land for a self-build property as long as the purchase meets all the other criteria for property purchase through the scheme.
If you’re uncertain whether the property you are looking to buy falls under the price limit of a Lifetime ISA and if you can use your government bonus, it is essential that you talk with an experienced solicitor or conveyancer.
Getting a mortgage with the Lifetime ISA
When you’re ready to apply for a mortgage, your Lifetime ISA savings can be used as part of your deposit. Keep in mind that the amount of your deposit will affect the amount you can borrow and the interest rate you’re offered.
Make sure to consult with a mortgage advisor for the best possible outcome. This professional can give you an estimate of how much you are able to borrow and what interest rates you might be offered. They will also provide guidance on which lenders accept Lifetime ISA savings as part of a down payment, allowing greater accessibility towards your future home purchase. Speaking with an experienced financial expert allows for great peace-of-mind when making decisions about one of life’s biggest purchases!
Planning Your Purchase
If you are planning on using your Lifetime ISA funds and the bonus towards purchasing a property, ensure that it is completed within 90 days of your conveyancer receiving those withdrawn funds from your Lifetime ISA manager. That way, all will be in order when it comes to putting forth everything you need for an exchange deposit.
If your property purchase is taking longer than three months to complete, then you can reach out to HMRC for an extension by having your conveyancer write a letter.
You can use your Lifetime ISA funds for any stage of the property purchase, as long as it meets certain conditions. Moreover, you have the freedom to apply these funds toward a deposit at exchange of contracts.
How do I transfer my Lifetime ISA (LISA) to my mortgage lender?
Before you can withdraw your savings, you will have to wait a minimum of 12 months from the date you first opened the Lifetime ISA. Once you qualify for withdrawing your savings you will need to do the following:
- Instruct your conveyancer or solicitor to request the funds from your Lifetime ISA provider. The funds will be transferred directly to your conveyancer or solicitor, who will use them to complete the purchase of your first home.
- You will need to give your Lifetime ISA details to your provider with your conveyancer or solicitor’s details and confirmation that the funds will be used to purchase your first home.
It’s important to note that you cannot simply withdraw the funds from your Lifetime ISA and then transfer them to your mortgage lender yourself. The withdrawal would incur a 25% withdrawal charge, which would significantly reduce the amount of money available to put toward your first home purchase. Instead, you must follow the above steps to transfer the funds directly to your conveyancer or solicitor to avoid the withdrawal charge.
- Learn what happens to your LISA between exchange and completion
- How to Provide Proof of Deposit for Mortgage Lenders
Saving for a First Home with a LISA
The Lifetime ISA is an ideal choice for those saving to purchase their first home. You can take out the funds and bonus without incurring any withdrawal charges, provided that the property costs under £450,000 and a mortgage has been taken on it. Additionally, please note that your Lifetime ISA provider must pay the money directly to your conveyancer or solicitor; furthermore, you’ll need to have had an account open with them for at least 12 months prior to withdrawing this funding.
If you have a Help to Buy ISA, you can transfer those savings into your Lifetime ISA or continue to save into both accounts. However, you can only use the bonus from one account for the first home purchase. The balance of a Help to Buy ISA can be transferred into a Lifetime ISA, provided that it is not more than £4,000. In the tax year 2017-2018, the total balance of a Help to Buy ISA, as of 5 April 2017, can be transferred into a Lifetime ISA without affecting the £4,000 limit.
In the case of multiple first-time buyers, each can use their own Lifetime ISA to receive the government bonus for purchasing a home. If buying a home with a non-first time buyer, the Lifetime ISA cannot be used without incurring a withdrawal charge.
Which UK banks or building societies offer Lifetime ISAs?
There are a number of UK banks and building societies that are . Some of the larger lifetime isa providers include:
- Lloyds Bank
- Skipton Building Society
- The Nottingham Building Society
- The Coventry Building Society
Before you chose a lifetime isa account, it’s essential to conduct thorough research and compare different providers. Be sure to take into account the interest rates, fees, additional features or advantages offered by each provider for an informed decision that best suits your desires.
What is a Cash Lifetime ISA?
A Cash Lifetime ISA is a type of LISA that allows individuals to save their money in cash, as opposed to investing it in stocks and shares.
Cash lifetime ISAS are offered by some banks and building societies, and allow individuals to earn interest on their savings, as well as receive a government bonus. Therefore, while a Cash Lifetime ISA is a type of Lifetime ISA, it has some distinct differences in terms of how the money is saved and invested. It’s important to note that not all LISAs are cash LISAs, and some may offer investment options, which can carry more risk but also potentially offer higher returns.