Owning a home is one of the key goals most of us hope to achieve. Yet with many of us continuing to rent into our late 20s and 30s, it can feel increasingly out of reach. But for those determined not to rent forever, the Lifetime ISA could be a great way to boost your savings!
Overview
What is a Lifetime ISA?
The Lifetime ISA (LISA) scheme was launched in 2017 to give first time buyers a helping hand onto the property ladder. The premise is straightforward. You can save up to £4000 each tax year and the government will add a bonus equivalent to 25% of the money paid in. So if you were to save the full £4000, that’s £1000 a year you can get for free. Yes you heard that right, for free! The bonus is paid into your account within a few weeks of your deposit.
What’s the Catch?
There are only three circumstances under which you can access your funds. Therefore, you should only pay into a Lifetime ISA if you are confident that you can afford to lock away the money until one of these scenarios applies. Early withdrawals are subject to a penalty which would result in you losing the 25% bonus and paying a charge equivalent to 6.25% of your contributions.
Valid Reasons to Withdraw
- You’re buying your first home
- You’re aged 60 or over
- You’ve been diagnosed as terminally ill with fewer than 12 months less to live
How Much Can I Save?
The earlier you start, the more you can save. LISAs are open to those aged 18-39 and you can pay in until you’re 50. So in theory if you were to open one at 18 and pay in the maximum £4000 each year, that’s a potential bonus of £33,000 (33 x £1000). However, there’s always the chance that the government may discontinue the scheme at a later stage.
How Quickly Can I Use the Money?
A LISA needs to be open for 12 months before you can use the funds. Therefore it’s best to open an account as soon as possible to start the clock, even if you only put in £1.
Do I Qualify?
In order to qualify for a Lifetime ISA you must:
- Be a resident of the UK aged between 18 and 39
- Not own any property anywhere in the world
- Be looking to buy a property worth £450,000 or less
In a couple? You can have one Lifetime ISA each. That’s potentially £2000 a year added to your savings!
How is a Lifetime ISA Different to a Help to Buy ISA?
The Help to Buy ISA scheme closed to new entrants on the 30th Nov 2019, but there’s no need to panic. For the majority of people a Lifetime ISA provides greater flexibility and increased savings. The main perk of a Help to Buy ISA is that you can use the money three months after opening an account, whereas with a Lifetime ISA you have to wait twelve months. Help to Buy also has no upper age cap so is good for those over 39.
As for why a Lifetime ISA is better? Well… for starters the maximum bonus you can receive is £33,000, which is far greater than the Help to Buy ISA’s £3,000. The other key selling point if that you can buy a house worth up to £450,000 anywhere in the UK, whereas with Help to Buy the cap is £250,000 outside of London.
How Do I Open a Lifetime ISA?
In order to open a Lifetime ISA you first need to choose a provider. I’d recommend checking out Money Saving’s Expert post here for the latest analysis of the best accounts on offer. The main decision to make is whether to open a cash LISA or a stocks and shares LISA. While stocks and shares make good investments over long periods of time, they are high risk over short periods. With growing concern around the global economy there’s a high risk your investments could drop in value and you won’t have the luxury of waiting for the market to turn around. I would therefore recommend opening a cash LISA.
Is There Anything Else I Need to Know?
Like most things when it comes to saving it pays to start early. Open an account today with £1 to kick-start the twelve month clock, then work towards putting in up to £4,000 each tax year to get your £1,000 bonus. It would be a shame to turn down free money after all!
So next time you find yourself doing a spot of fantasy house shopping on Rightmove make sure to start paying into a Lifetime ISA to help turn that dream into a reality!
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