What is a Lifetime ISA?

You may have heard friends, family, and colleagues talk about the ‘Lifetime ISA’, but what is it?
A Lifetime ISA (Individual Savings Account), or ‘LISA’, is a government-backed scheme designed to help you buy your first property. The government adds a bonus to your savings, giving you a head start on reaching your financial goals.

Alternatively, you can use a Lifetime ISA (LISA) to save for later life, with the added benefit that it’s a tax-free savings account. To open a LISA, you must be aged between 18 and 39. You can contribute up to £4,000 each tax year into the account until you turn 50. It’s important to note that your first payment must be made before your 40th birthday.

Unlike a standard ISA, the Lifetime ISA has specific rules about how and when you can withdraw money, and there are penalties if funds are taken out for purposes other than buying a first home or when you turn 60.  Understanding these details can help you make the most of this savings option.

How does a Lifetime ISA work?

A Lifetime ISA (LISA) is a tax-free savings account designed to help you save for your first home or for later life, from age 60 onwards. You can contribute up to £4,000 each tax year, and the government adds a 25% bonus to your contributions, meaning for every £4 you save, the government adds £1, up to £1,000 per year.

You can only open a LISA if you are aged 18 to 39 and a UK resident. After your account is open, you must wait 12 months before withdrawing funds for a first-home purchase. After this period, the money can be withdrawn without penalty when buying your first home (up to £450,000) or after turning 60. 

If you wish to withdraw funds for any other reason, a 25% government charge usually applies, which can reduce your savings. You do not have to wait 12 months to exercise this option.

Because the account grows tax-free and includes a monthly government bonus, your savings can build up faster than in a standard ISA. Planning how and when you contribute can help you get the most from a LISA.

Types of Lifetime ISAs

There are two main types of Lifetime ISAs:

Cash Lifetime ISA

●    Works like a regular savings account (terms and conditions apply).
●    Interest is earned on your contributions.
●    Suitable for savers who prefer lower risk.

Stocks and Shares Lifetime ISA

●    Money is invested in the stock market.
●    Potential for higher returns over the long term.
●    Risk of loss is greater than with a cash LISA, so it suits those comfortable with investing.

How many Lifetime ISAs can I have?

You can only open one Lifetime ISA per tax year. This means you cannot pay into multiple accounts in the same year and still receive the government bonus.

If you attempt to make contributions to a Lifetime ISA after already contributing to another one in the same tax year, your contributions will be rejected and refunded to you.

Whether your LISA is a cash or stocks and shares account, the rule remains the same: one account per tax year. This helps keep your savings simple and ensures you receive the full government bonus without any issues.

What are the limits of the Lifetime ISA?

If, like many, you are looking to use a Lifetime ISA to buy a home, there are a few restrictions to consider. As only first-time buyers can use Lifetime ISAs to buy a home, this means you can’t own, or have owned, a home in the UK.  

You’ll also need to:

●    Buy a home for no more than £450,000. 
●    Be purchasing a home, you plan to live in.
●    Process the purchase with a mortgage.
●    The account must be open for at least 12 months before you can use the funds for a home purchase. 

Did you know? You can combine your Lifetime ISA with other schemes, such as shared ownership. 

How does the Lifetime ISA Government Bonus work?

The government bonus for a Lifetime ISA (LISA) is 25% of the amount you contribute.  Since you can contribute up to £4,000 per tax year, this means the maximum bonus amount you could receive from the government is £1,000.

However, it is important to note that the government charges a penalty for withdrawing from a Lifetime ISA when the withdrawal is not for the intended purposes of first-time home purchases or after turning 60. This charge is designed to disincentivise the misuse of the Lifetime ISA, and encourage investors to keep saving.

What are the government penalties?

A 25% charge is applied by HMRC if you withdraw money for reasons other than buying your first home, or after you turn 60. This effectively removes your government bonus and a portion of your own savings. There are exceptions, such as terminal illness, where the penalty does not apply.

Rules for using a LISA to buy your first home

●    The property must cost £450,000 or less.
●    You must be a first-time buyer and aged 18+.
●    The account must be open for at least 12 months before funds can be used toward a home purchase.

Using a LISA wisely allows first-time buyers to take full advantage of the government bonus while building their deposit faster. Comparing rates and fees across providers can help maximise your savings growth. For example, Unity Mutual currently offers a 4% (AER) Lifetime ISA* for anyone aged 18–39 saving for their first home and/or later life, with the added 25% government bonus.

By starting early and contributing the maximum each year, a LISA can accelerate your path to home ownership while taking full advantage of the government bonus.

Have any more questions about the Lifetime ISA?

Head to our dedicated Lifetime ISA page for more information about the account, including details on our interest rate, terms and conditions, and instructions on how to apply.

Can’t find what you’re looking for? Do not hesitate to contact the Unity Mutual team; we’ll be more than happy to answer any of your questions. 

If you’re in any doubt about whether this product is right for you, it’s a good idea to talk to an Independent Financial Advisor (IFA). You can find a local financial advisor by visiting www.unbiased.co.uk. You may need to pay for a financial advisor’s help, so make sure you ask them about their fees first.

*Terms and conditions apply.