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Five things to know about lifetime ISAs

Written by Gemma Bellamy and Simon Hartshorn, Product Manager

So you’ve heard about lifetimes ISAs (LISAs) and you’re wondering if it’s worth opening one.

There’s a lot of information out there, but if you’re looking for quick lifetime ISA facts, you’re in the right place. Let's dive in.

About lifetime ISAs

First off, here’s a quick overview of lifetime ISAs:

They're individual savings accounts designed to help you save for your first home, or to save extra money for retirement.
You need to be aged 18-39 (inclusive) to open one.
If you’re using the money towards buying a property, it’ll need to be your first home (you can’t have owned a home before) and can’t cost more than £450,000.
You can save or invest up to £4,000 each tax year, and the best part – the government will top up everything you put in by 25%.
There’s a withdrawal penalty charge if you don’t use your LISA the way the government intended.

Five things an expert wants you to know about lifetime ISAs

A lifetime ISA can be a great way to boost your savings. But there are some specific rules to be aware of, so it’s important to do your research before opening the product.

We asked Simon Hartshorn, a Product Manager at OneFamily, what the key things are that people should know about lifetime ISAs (this is not an exhaustive list).

Here's what he had to say.

1. The £1,000 LISA bonus

This is surely the best lifetime ISA benefit. The government pays in when you do, topping up everything you pay in by 25%.

So if you pay in £4,000, you’ll get an extra £1,000 added to your LISA pot.

As £4,000 is the maximum you can pay in each tax year, £1,000 is the maximum bonus you’ll get each year.

2. You can keep paying in until the age of 50

You can keep paying into your lifetime ISA - and getting the bonus - until you turn 50.

This means that if you’ve used your lifetime ISA towards your first home, you can keep it open and carry on paying into it.

However, if you withdraw any of your money before your 60th birthday (unless it’s to buy your first home) then you’ll have to pay a 25% government withdrawal charge. I’ll explain more about that below.

The exception is if you become terminally ill. In this case, you’ll be able to withdraw your money without paying a penalty fee.

3. The lifetime ISA government withdrawal charge

This is where understanding the specific rules for lifetime ISAs is key.

Technically, you can withdraw money in your lifetime ISA whenever you like. But if you don’t stick to the lifetime ISA rules, you’ll be charged a fee of 25% of the money you withdraw.

This can mean that you not only lose the bonus but you could also lose some of your own money as well.

The lifetime ISA rules:

Your lifetime ISA should be open, with money in it, for at least a year before you withdraw any funds.
Your lifetime ISA should be used towards your first home, or for anything you like after you turn 60.
You must intend to live in the home.
You must use a mortgage to buy the property (this can’t be a buy to let mortgage or a private mortgage).
The home you buy must cost no more than £450,000.

For a more in depth look at how the withdrawal charge works, and the impact growth and interest could have on the amount you end up with, check out our withdrawal charge article.

4. An extra pot of money for life after 60

Lifetime ISAs are best known for being used towards first home purchases. But if you wait until your 60th birthday, you can also use the money however you choose.

A word of warning though. Having a lifetime ISA instead of a pension may not be a good idea if you are employed or a higher rate taxpayer. This is because you may miss out on employer contributions to your pension, or tax relief at 40%, which could both give you more than the 25% government bonus.

Of course, you can have both a LISA and a pension – if you have any spare income, a lifetime ISA is one way to top-up your retirement savings. You can only pay into a lifetime ISA (and receive the bonus) until the age of 50 though, so bear that in mind.

You should seek advice from a professional before deciding how to save for your retirement.

5. Stocks and shares LISAs for potential long-term growth

A stocks and shares lifetime ISA (where your money can be invested in the stock market and other lower risk investments) could grow your money more over the long-term compared to a cash lifetime ISA (where you are paid a rate of interest).

At OneFamily, we only offer stocks and shares lifetime ISAs.

With investing there's good potential for your money to grow over the long-term, but there is a risk that the value could go down.

So it’s smart to only invest in a stocks and shares lifetime ISA if you plan to keep your money invested for at least five years, as fluctuations tend to even out over time.

So if you expect to be saving for a deposit for more than five years, a stocks and shares lifetime ISA could be a good option for you.

OneFamily's Lifetime ISA

Lifetime ISAs aren’t for everyone. But if you meet the eligibility criteria and plan to use the money the way the government intended, they can really help you build your first-home deposit or extra retirement money faster.

Learn more about our Lifetime ISA

Our Lifetime ISA invests in stocks and shares. This means it has good potential to grow, but the value of your investments could go up as well as down, and you could get back less money than you’ve put in.

Saving for something other than a first home? Take a look at our Stocks and Shares ISA.