If you’re over the age of 40, you may have missed the boat for a Lifetime ISA bonus. Unless you already have a Lifetime Individual Savings Account, in which case you can keep on earning bonuses up to age 50. But you may have friends, family and colleagues who could benefit, so read on for more information about this lesser-known savings incentive.
Lifetime ISAs replaced ‘Help to Buy’ ISAs back in 2017, so they can sometimes still be regarded as a savings plan for first time buyers. But as the name suggests, this type of savings plan can deliver benefits over your lifetime. Thinking of the longer term, this can be a super option to help plan for a flexible lifestyle on the approach to 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’s a pretty 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 2023/2024.
With generous incentives like this, there will always be conditions. In the case of a Lifetime ISA, 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%. So broadly speaking, the government will recover the bonus paid on your original savings, but take note: 25% of what you take out is more than 25% of what you put in!
For more detail on how the withdrawal penalty works, see this article from Which.
A helping hand onto the property ladder
If you still have one of the older Help to Buy ISAs, you can still make contributions until November 2029. The newer Lifetime ISA, however, offers 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 flexibility in retirement
If you’re not saving towards your first house purchase, don’t give up on a Lifetime ISA bonus just yet. This could provide a valuable boost to your savings for enjoyment 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. This can help you 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, which is moving towards 67, 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.
Cash or stocks and shares?
Lifetime ISAs allow you to choose between cash or stocks and shares. The choice will come down to your investment 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, cash avoids the short-term volatility risk of the stock market.
On the other hand, if you’re thinking longer term, then stocks and shares can offer better growth potential.
Find a provider to secure your Lifetime ISA bonus
Not all providers offer a Lifetime ISA option, but here are two comparison sites that outline some of the more highly rated or lower cost options:
The Lifetime ISA bonus is still relatively underused, although awareness is growing and more people are starting to make use of it. If you’re under the age of 40 and don’t yet have one, open one now. There really is no downside, but once you pass that age limit, you could lose up to 10 years’ worth of bonuses on future contributions.
And if you know someone else under 40 who doesn’t yet have a Lifetime ISA, do them a favour and let them know what they’re missing out on.