Lifetime ISA: what first time buyers need to know


Lifetime ISA: what first time buyers need to know

Announced in George Osborne’s 2016 Budget, the new Lifetime ISA allows you to set aside cash in a tax free savings account to put towards buying your first home or for your retirement.

Like any ISA, you won’t be taxed on the money when you withdraw it – unlike in a regular savings account. The Lifetime ISA will be available from April 2017.

An ISA for life

This new ISA allows you to save up to £4,000 a year and receive an additional 25% contribution from the government. So, if you saved the maximum amount each year, you’d earn an extra £1,000 on top of that just for depositing it in a Lifetime ISA.

Your account should be topped up with the 25% extra at the end of every tax year until you’re aged 50. Once you reach 50 years old, the government will stop paying into your ISA.

In order to qualify for a Lifetime ISA, you’ll need to be 18 years old and you mustn’t have had your 40th birthday by the time the scheme is active in April 2017.

When can I withdraw the cash?

The savings are set aside until you need to access the cash for a purpose that the government has specifically outlined. This means that you can only access the money to put towards buying your first home, from the day you turn 60 years old or at any point that you are diagnosed with a terminal ill-health condition.

In one respect, the Lifetime ISA could be seen as an extra pension savings pot, as if you already own a home then the money you earn can be put towards your retirement. You’re perfectly able to pay into this ISA and continue to pay into your work-based pension too.

You’re free to withdraw the money at any point – providing you’ve had the account for at least a year – but there are penalties if it’s not used for one of these three purposes. Should you choose to withdraw the cash at any other point, you’ll lose the government bonus and you could be charged 5% of the amount you withdraw.

What if I already have an ISA?

If you have a Help to Buy ISA*, or you’re thinking of taking one out, you’ll be glad to know that you’re perfectly able to move your funds over to a new Lifetime ISA. The cash you’ll earn in this new ISA will be slightly more than what you would earn in a Help to Buy ISA, but the money must go towards one of the three purposes outlined above – which is more options than the Help to Buy ISA.

You’re completely able to pay into other ISAs at the same time too, with the limit set at £20,000 for the 2017/2018 tax year. This means you can save a maximum of £20,000 each year in all of your ISAs, so you could put £4,000 in your Lifetime ISA and more money scattered in others like a cash ISA or a stocks and shares ISA – so long as the total isn’t more than £20,000. If you have cash in other ISAs, you’ll be allowed to transfer this over to your Lifetime ISA if you so wish, but you still have to abide by the £4,000 a year limit.


*It was reported in August 2016 that the government bonus on Help to Buy ISAs cannot be included in the initial deposit on a home, but is paid once the sale has completed. Find out more here.