Buying Your First Home Using a Lifetime ISA
A Lifetime ISA (LISA) is a government scheme that launched in April 2017. It’s a savings account that helps British residents save for their first home or for their pension later in life. It allows you to save up to £4,000 every tax year with a 25% government bonus on top.
Saving for a deposit can be extremely daunting and so any extra help you receive is a welcomed bonus. The latest figures from the government’s Office for National Statistics show the average deposit for first time buyers in Greater London is almost £111,000. This varies in every region with the lowest in Scotland currently around £20,000.
Compare My Move have created this guide to help you understand what a Lifetime ISA is, how it works and how it can benefit you in saving for your first home or pension.
What is a Lifetime ISA?
The Lifetime ISA (LISA) is a government scheme that helps people save for their first home or even for their retirement later in life. If you open a Lifetime ISA, the government will provide a 25% bonus to your savings. The maximum amount for this bonus is £1,000 a year.
Much like any other ISA, the interest for the LISA is tax-free, but with a 25% bonus paid by the government directly into your account. This means that for every £4 you put into the Lifetime ISA, the government will put in £1. Your deposits are capped at £4,000 per tax year until your 50th birthday.
If you’re using the Lifetime ISA to save for your first house, you must ensure that the property doesn’t cost over £450,000. You can also use your LISA funds as a deposit for a Shared Ownership or Right to Buy property if the house doesn’t exceed the limit.
To ensure you’re fully aware of what the Lifetime ISA entails, here are the main key points:
- You can save up to £4,000 per tax year
- You get a 25% government bonus every month
- You can earn interest on this bonus
- You can open the account if you’re aged between 18-40
- The bonus applies until you’re 50 years old
- You can use the savings to pay for the deposit on your first house or to use in retirement
- You will receive the government bonus 12 months after opening the account
- You can switch to other Lifetime ISA providers at any point
- There is a 25% penalty for withdrawing the money for any reason other than buying a home or retirement - however, people who are terminally ill with less than 12 months to live can withdraw without penalty.
Who Can Get a Lifetime ISA?
Any UK resident aged between 18-39 can open a Lifetime ISA. Once you reach your 50th birthday, you can still continue to use and put money into the ISA. But to open one, you must be younger than 40 and older than 18.
One of the LISA’s main roles is to aid first-time buyers in saving for their first house. However, you do not have to be a first-time buyer to qualify for one. Any UK resident within the required age bracket can open a Lifetime ISA.
What Are the Advantages of a Lifetime ISA?
As well as providing you with two options for using it, the Lifetime ISA has a variety of advantages to consider. If you use the scheme to save for the deposit on your first home, it will help with your conveyancing costs as the deposit is a large chunk that needs to be saved in advance.
These advantages include:
- You can save up to £4,000 a year
- Your maximum bonus can be as high as £32,000
- You can earn interest on the government bonus
- It can be used to purchase any property that costs £450,000 or less
- You can pay in lump sums
- You can use it for a Shared Ownership or Right to Buy property
- Two people can have Lifetime ISAs and use both bonuses towards home purchase
- The £450,000 limit does not increase if two people are buying a home together
- All proceeds from the ISA are tax-free
What Are the Disadvantages of a Lifetime ISA?
Despite the range of options and the large government bonus, there are also disadvantages of the Lifetime ISA. Official figures have revealed that more than 1,500 savers had to pay an average of £695 as punishment for withdrawing money early from their LISA. A Freedom of Information request discovered that £1.05 million had been paid in penalties by savers aged under 40 between April 2017 and April 2019.
Other disadvantages include:
- You can’t open one if you’re over 40
- You have to have a Lifetime ISA for over a year before you can receive the bonus
- You can receive your pension at 55, whilst for a LISA it’s 60
- The rules and regulations may change along with the government
- There’s a 25% exit charge if you use it for anything outside of buying a house or retirement. However, there’s no penalty charge for those with a terminal illness who have less than 12 months to live.
- Remember, if you choose a LISA instead of enrolling in, or contributing to, a workplace pension scheme, you will miss out on the benefit of your employer’s contribution to that working pension scheme.
Can Both My Partner and I Get a Lifetime ISA?
Yes, both you and your partner can open a Lifetime ISA if you meet the eligibility criteria. If you’re both first-time buyers then you can each use your LISA to purchase your first home. The £450,000 limit will not increase but you will both still receive the 25% government bonus.
If only one of you meets the criteria for opening an account, then only that person can use a LISA. You can open one account per person.
What Happens if the House Sale Falls Through?
If the property sale falls through then your conveyancing solicitor will have to return the funds and ensure that the bonus is paid back. The deadline for this can vary but it’s typically within 10 working days. This will not count as a withdrawal and so you shouldn’t have to pay a penalty.
Can I Keep Saving For Retirement if Circumstances Change?
One of the uses for a Lifetime ISA is to save for retirement. If your house sale falls through or you’re no longer looking to use the account to buy your first house, you can continue using your LISA to save for your pension.
Depending on the state of the government, the rules for this scheme could change in the future. However, these are the current conditions for using a LISA to save for retirement:
- You can only access your savings after your 60th birthday
- You can make partial withdrawals
- The money is tax-free
- You will still receive interest
- Unlike a pension, it will affect your eligibility when applying for benefits
If you plan to use your LISA to save for your retirement, it would be wise to first speak to an independent Financial Adviser or to visit The Pensions Advisory Service website for more information. It’s important to remember that with a pension, you can access your funds at 55 rather than 60. There’s also the issue of paying a penalty if you withdraw funds from your LISA too early.
Should I Choose a Lifetime ISA or Help to Buy ISA?
The Help to Buy ISA deadline was 30th November 2019 and has now passed. British banks no longer offer this account and so you cannot apply to open one. However, if you already have one, you may be considering switching to a Lifetime ISA instead. Before you decide, here are the main differences between a Help to Buy ISA and a Lifetime ISA:
|FAQ||Help to Buy ISA||Lifetime ISA|
Who’s it for?
First-time buyers and those saving for retirement
Up to £1,000 when opening the account, and a maximum of £200 each calendar month
Capped at up to £4,000 per tax year
Minimum monthly deposit?
Property price cap
Up to £250,000 across the UK, up to £450,000 in London (total cost of the house)
Up to £450,000 across the whole of the UK (total cost of the house)
Bonus limited to £3,000 overall (25% of £12,000)
No overall cap, 25% of total deposit (max £1,000 a year)
Where does the bonus go?
Bonus is added after purchase is complete by your conveyancer or solicitor
Bonus is paid directly into account after the first year, then monthly after this
Withdraw funds at any time. You will not receive the 25% bonus on funds withdrawn for anything other than your first house
25% charge if withdrawing before your 60th birthday or if funds not used towards your first house
Age of applicants
16+, no age limit if first-time buyers
Open an account between 18 and 39. Pay into account up to your 50th birthday.
Can be used for an exchange deposit?
Can it be used for a mortgage deposit?
Saving With Compare My Move
If you’re using a Lifetime ISA to save for your first house deposit, then don’t forget to compare conveyancing quotes once you’ve found the home for you. There are a variety of costs that come with moving house and so using a government scheme such as a LISA will help you save money in advance.
Compare My Move only work with the most qualified and experienced professionals, helping you receive first-class services to aid you in the moving process. From finding the right property surveyor to hiring the best removal company in your local area, our team are here to ensure your move is as stress-free and organised as possible.