Should I Save In A Lifetime ISA?
What is a Lifetime ISA?
The Lifetime ISA is an individual savings account designed to help people save towards their first home or retirement. Each tax year, you’re allowed to pay a maximum of £4,000 into your Lifetime ISA, of which the government gives you a 25% bonus. This means that if you pay the maximum amount of £4,000 into your ISA every year, the government will give you an extra £1,000 per year.
Note: The amount you pay into your Lifetime ISA is linked to your annual ISA allowance (£20,000 for the year 2022/23) however any bonus you earn doesn’t count towards this allowance.
Who can open a Lifetime ISA?
To open a Lifetime ISA you must be:
- Aged between 18 and 40 years old
- A UK resident or crown servant
How Can I Use My Lifetime ISA?
You can use your Lifetime ISA to save towards your first home, or save towards retirement. Here are a few restrictions to note when deciding whether a Lifetime ISA is right for you.
Saving towards your first home
- You can only use a Lifetime ISA to buy your first home. This means that if you already own a home, or have owned one in the past, you cannot use the Lifetime ISA to buy another.
- The home you choose to buy must cost under £450,000. You cannot use your Lifetime ISA to buy a home above this price.
- You must intend to live in the home you are purchasing. This means that you can’t use the Lifetime ISA to buy a holiday home or a house you will rent out.
- You cannot buy your new home outright. It must be bought using a traditional mortgage.
Saving towards retirement
If you are saving towards your retirement, you can’t withdraw the money from your Lifetime ISA until you are 60 years old. Once you reach this age, you are able to withdraw as much as you like without any restrictions or penalty charges.
What happens if I withdraw money for other reasons?
If you withdraw money from your Lifetime ISA for a purpose not listed above, you will receive a 25% penalty on the amount of money withdrawn. For example, if you withdraw £1000, you will need to pay a £250 penalty.
This penalty is unavoidable unless you have been diagnosed with a terminal illness. In that case, you’ll be able to withdraw money freely without the penalty fee.
Conclusion
Only you can decide whether opening a Lifetime ISA is the right decision for you. But here’s why I opened mine:
- I’m aged between 18 and 40 yeards old.
- I am saving towards my first home, which I don’t intend to rent out.
- I don’t imagine that my first home will cost more than £450,000, so that restriction doesn’t affect me.
- How can I say no to a £1,000 bonus every year?
Perhaps if you’re in a similar situation to me, opening a Lifetime ISA is a great idea!