Lifetime ISAs, which launched in April 2017, are designed to help under-40s onto the housing ladder, but they can also be used as a retirement savings vehicle.
Designed to replace the now-defunct Help to Buy ISA, the policy was the brainchild of former chancellor George Osborne and his Treasury wonks. Though they replaced Help to Buy ISAs, holders of Help to Buy products can still contribute to their plans.
As well as the tax advantages of the standard ISA, the Lifetime ISA carries a sweetener from the government – to show it's serious about your aspirations to become a homeowner.
This in the form of a 25% bonus, up to a maximum of £1,000 a year. If you max out the allowance every year from age 18 to 39 you could pocket £32,000 from that bonus – unsurprisingly, then, there are a few strings attached.
The Lifetime ISA: What Are The Rules?
But before we get to the FAQs, it’s worth noting the conditions surrounding withdrawals because these are punitive:
1. Money put into a Lifetime ISA must be used to buy your first home OR not accessed until you're 60 (or if you become terminally ill) – otherwise you will incur a penalty for withdrawing moeny from the account.
2. The early withdrawal charge is 25%. So says the government: "a Lifetime ISA is intended to be a long-term savings product. It is not designed to encourage regular withdrawals." The early withdrawal charge was reduced to 20% in the coronavirus crisis but has since been reinstated.
3. This means that withdrawals could end up costing you money – for example, you put in £800, the bonus tops this up to £1,000, you withdraw the whole lot and the 25% penalty takes this back to £750. So you're left with £50 less than you put in.
4. Financial advisers recommend holding an instant access Cash ISA alongside your LISA if you need to "dip into" your funds for everyday or unexpected expenses.
A full explanation of terms and conditions can be found on the UK government website.
The Lifetime ISA: Terms & Conditions
You can save a maximum of £4,000 a year into a Lifetime ISA and you need to be between 18 and 40 to open an account. While the product has "Lifetime" in the name, you can only save every year until you're 50, giving you a maximum of 32 years to enjoy that bonus.
Can I Have a Lifetime ISA and a standard ISA?
Yes, although this £4,000 is not in addition to your overall annual ISA allowance, so if you used your whole lifetime ISA allowance, that leaves you with £16,000.
Tell me about the bonus!
It's 25% of the money you put in, up to a maximum of £1,000 a year. The provider will add this automatically and it doesn't matter if you drip feed your money or put your whole allowance in on the last day of the tax year.
Can I open a Lifetime ISA (Cash) and a Lifetime ISA (Stocks & Shares)?
Not in the same tax year. You can have both types of account but you can only open one type of Lifetime ISA each year.
Did the Spring Budget increase the Lifetime ISA allowance?
No. The Lifetime ISA allowance has been £4,000 since launch, despite attempts by lobbyists to increase it in line with inflation or house price gains, which since 2017 have made it even harder for first-time buyers.
I already own a property, can I open a Lifetime ISA?
You can open an account but you won't be able to use the money to buy a property – only first-time buyers can use the account in that way. A non-FTB can still enjoy the perks of the account (i.e. the bonus) but you won't be able to access the money until you reach age 60. If you've previously owned a home, are now renting and want to get back on to the housing ladder, you are also not eligible.
Can I use a Lifetime ISA to buy property in London?
The current limit on properties that can bought using a Lifetime ISA is £450,000. You can buy anywhere in the UK, though most properties in London will cost you more than half a million. This puts home ownership in the capital beyond the reach of most policy holders.
Are Lifetime ISAs popular?
The Lifetime ISA is relatively new, so the product makes up a small but growing portion of the overall ISA universe (see official stats for the full data), in terms of subscriptions.
According to HMRC data for 2022/23, 56,100 account holders withdrew from their Lifetime ISAs in order to purchase their first home in that tax year, an increase of around 10% on the previous tax year. The average value of withdrawal for a house purchase was £13,877.
Is that enough for a deposit?
It's a start, but, according to Zoopla, the average deposit paid for a three-bedroom house bought by a first-time buyer was £34,500 in 2023. In areas with higher house prices, this is likely to be higher. So there's an obvious "deposit gap" here. The Lifetime ISA hasn't been running for very long so wannabe first-time buyers haven't had enough time to enjoy the cumulative effect of those government bonuses. Or maybe they've decided not to wait and scrambled on the housing ladder while they can...
