It’s the word on every first time buyers lips lately, the Lifetime ISA. There’s been a huge surge of interest in the Lifetime ISA recently, with many first time buyers looking for ways to increase their chances of securing their first home. But what is a Lifetime ISA? And what are the benefits compared to a Help To Buy ISA?
Well, a Lifetime ISA (LISA) is a tax-free individual savings account that allows you to save up to £4,000 a year, with a whopping 25% bonus added each year, meaning you can essentially receive a maximum of £1,000 per year for free, all thanks to the government.
A Lifetime ISA is very similar to a Help To Buy ISA but with the addition of a few more helpful benefits. You can use your Lifetime ISA to buy your first home before the age of 50 on any property worth up to £450,000, or after the age of 50 you can use your money towards your pension.
Eligibility for a Lifetime ISA
Opening a Lifetime ISA is simple. All you need is to be aged 18-39 and be a permanent resident in the UK.
You can use cash, stocks, shares or a combination of them to build your savings. Your money will receive 25% tax-free bonus each year on the amount you saved in that year up until the age of 50. After this, your account will stay open but you won’t be able to make any more payments into the account. The Lifetime ISA must be used as a deposit for a house paid for by a mortgage, so make sure you get in touch with a mortgage broker once you’ve saved to find the best mortgage on the market. Or you can use it for your retirement as an extra pension.
You can withdraw money from your LISA before the age of 60, but it’ll cost you. As with many ISA’s, you’ll be charged for withdrawing any money if it isn’t used for the deposit on your first house or for your pension.
Any withdrawal is charged at 25%, so you’d be right to think that anything you’ve received as a bonus is removed, but you’re wrong. For example, if you’ve saved £1,000 and you receive 25% bonus of £250, you have a total of £1,250. You then want to withdraw this amount, and you receive a 25% withdrawal charge on the £1,250 making £312.50, leaving you with a total of £937.50.
You won’t be charged if you’re terminally ill with 12 months to live or if you die. In these circumstances, the 25% charge does not apply. However, if you die and the money is passed to your next of kin, the withdrawal fee is removed, but this is then classed as inheritance and would receive an inheritance tax charge.
Lifetime ISA vs Help To Buy ISA
With the introduction of the LISA, would-be homeowners now have two government-funded options in order to help them save for their first home. Up until April 2017, the Help To Buy ISA was the clear choice for first-time buyers, with an attractive 25% bonus on top of what you saved. However, April 2017 saw the Help To Buy ISA trumped, when the LISA was introduced, offering first-time buyers the option to save more money each year and earn a higher amount of bonus and interest. But which is actually better? We’ve got the full details on a Help To Buy ISA, but in the battle for the better ISA, we’ve compared the two with some quick stats, so you have a better idea of what they offer and how they differ:
|Lifetime ISA||Help To Buy ISA|
|Yearly Saving||£4,000||£2,400 (£3,400 in the first year)|
|Max Bonus||£32,000 (max contributions per year)||£3,000|
|Bonus Payment||Yearly (interest made on the bonus)||Upon purchase of the house|
|Lump Sums||Yes||No (monthly savings only)|
|Max House Price||£450,000||£250,000|
|When It Can Be Used for a House||After 12 months of the ISA being open||After £1,600 has been saved (can be saved in 3 months)|
So there you have it. Each ISA comes with it’s own caveats and the LISA may not be for everyone. The Help To Buy ISA has its own benefits, including the option to buy a house quicker (3 months) and can be opened at 16, rather than 18 which makes it a great choice for those with parents wanting to help their children get on the property ladder quicker. And if you’ve already opened a Help To Buy ISA then not to worry, as you can transfer your savings to a Lifetime ISA, allowing you to save more for longer.