If, like me, you’re over the age of 40 and don’t already have a Lifetime ISA, you might not get much value from this article. Unless, of course, you know someone else under 40 who wants free money towards a first home. Read on, and you can tell them all about it!
This is my fifth out of six articles about Individual Savings Accounts. If you need a reminder of the general concept of ISAs, you’ll find it here.
Even though I don’t qualify for a Lifetime ISA personally, out of sheer concern for your financial welfare, dear reader, I’ve taken a bit of time to summarise the main points. And actually, there are good benefits for the right people.
These are not just for first time buyers hoping to jump onto the first wrung of the property ladder. Lifetime ISAs can also be a valuable tool to help plan for a flexible and free retirement.
Free money from the government
First off, let’s look at the incentives. You can save up to £4,000 per year into a Lifetime ISA and the government will add a 25% bonus, up to a maximum of £1,000 per year. That, it has to be said, is a very decent return on your investment.
This may continue up to age 50, so theoretically, if an 18-year-old were to fully fund their Lifetime ISA every year to age 50, that could be an incredible £32,000 of free money. But governments are always changing rules and allowances, so it would be something of a surprise if these rules stayed the same for the next 32 years. Make the most of it!
The current £4,000 limit forms part of the overall annual ISA allowance, which is £20,000 going into 2021/2022.
The restriction on this incentive is that withdrawals can only be made if you are:
- Buying your first home
- Aged 60 or over
- Terminally ill, with less than 12 months to live
Withdrawals for any other reasons will attract a charge of 25%. Basically, the government will recover the bonus it paid on your original savings, so not the end of the world.
A helping hand onto the property ladder
Lifetime ISAs were introduced in April 2017 and they have now replaced the older Help to Buy ISA. Both were designed as an incentive to save up for a deposit towards your first home, although the newer version offers much better bonus potential and can also help towards retirement planning.
Money saved in a Lifetime ISA can be used to fund a house purchase, providing the following apply:
- the property costs £450,000 or less
- you buy the property at least 12 months after you make your first payment into the Lifetime ISA
- you use a conveyancer or solicitor to act for you in the purchase – the ISA provider will pay the funds directly to them
- you’re buying with a mortgage
If you’re buying a home with someone else, you can both use a Lifetime ISA towards the purchase.
A boost towards financial freedom in retirement
Even if you don’t fancy buying a property, or if you’re unsure, don’t dismiss a Lifetime ISA just yet. The tax advantages and government bonuses could help build up savings to enjoy later in life.
Any Lifetime ISA savings that you don’t use towards a property purchase can be withdrawn when you’re 60 or over. Normal ISA rules apply when it comes to tax, which means you could build up a tax-free pot of cash to use alongside any pension plans in retirement. If you want to retire before the state pension age (currently 66), that could be valuable.
Retirement might feel a long way off if you’re under 40 now, but the effects of compound growth in a tax-free account will be something your future self will thank you for.
Lifetime ISA cash or investment options
Lifetime ISAs allow you to choose between cash or stocks and shares, which I have covered previously. The choice will come down to your timescales and how long you expect to hold the ISA. For example, if you plan to use the savings towards your first home in the next 5 years, a cash ISA avoids the short-term volatility risk of the stock market.
On the other hand, if you’re thinking longer term, then stocks and shares ISAs can offer better growth potential.
Find a provider and take action – quickly!
If you’re reading this in March 2021, there are only a couple of weeks left before the current tax year ends on 5th April. So be quick if you want to use some of your remaining allowance for this year.
You can check in with your own bank or building society account, investment provider or this comparison page from ‘Money to the Masses’ lets you see various options.
Financial coaching can also help you to build confidence and knowledge in all areas of finance, so do get in touch if you fancy finding out more.
Summary
Lifetime ISAs offer a meaningful bonus and that alone could help incentivise savers to take action and begin building up money for the future.
I’m all for anything that encourages good financial behaviours, so for the right people, this is well worth a look. Shame I’m slightly too old (ahem) to take advantage of it myself.