Six things you should know about the Lifetime ISA

With the new Lifetime ISA now officially in existence Darren Cornish, director of customer experience at The Share Centre, outlines six things investors should be aware of before they open an account.

Six things you should know about the Lifetime ISA

You need to be aged between 18 and 39 to open a Lifetime ISA

You can take out a Lifetime ISA from the age of 18 right up until the day before your 40th birthday, so if you are due to hit that landmark soon you will need to get your skates on to open an account. However, once it’s open you can carry on paying into your Lifetime ISA until the day before you turn 50.

The Government will top up your savings by 25%

For every pound you pay into a Lifetime ISA, you’ll receive a 25% bonus from the Government. That’s up to £1,000 of free money every year until your 50th birthday. It’s a compelling reason for opening a Lifetime ISA and by far the most attractive feature of the product among the investors we have spoken to. If you’re able to invest the full allowance of £4,000 every year from your 18th birthday you could earn £32,000 in ‘free’ money from the Government by the time you’re 50.

A Lifetime ISA can be used to buy your first home or to fund retirement

Any time from 12 months after making your first payment into a Lifetime ISA, you will be able to use those savings and bonus towards a deposit on your first home, worth up to £450,000 in the UK. Accounts are limited to one per person (rather than one per home), so two first-time buyers can both receive a bonus when buying together. Do be aware though that the twelve month rule is applied individually to each account opened.

You can also use the money for your retirement: after your 60th birthday, you can take out all your savings tax-free. You can withdraw the money (for any other reason) at any time before you turn 60, but you may have to pay a 25% withdrawal charge on the amount you take out.

The Lifetime ISA is not for everyone

You should take full advantage of your pension before saving into a Lifetime ISA. A workplace pension will have valuable employer contributions, and even a personal pension could be more beneficial if your investment goal is retirement alone. And since the Lifetime ISA is classed as personal savings, it can also impact means-tested benefits.

If you are not a first-time buyer, it is important to remember that there is a 25% withdrawal charge if you take out any money before your 60th birthday (except in the case of terminal illness). This charge is waived in the first year but only if you withdraw the funds in full and close the account altogether.

However, we know from our customer research that some see the withdrawal charge as a good deterrent to ‘dipping in’. In our survey of investors aged 18-39, over one in ten (13%) said they like the idea of the charge as they won’t be tempted to take out their money too soon.

You can transfer your Help to Buy ISA into a Lifetime ISA

The Lifetime ISA and the Help to Buy ISA are similar products, with both offering a 25% government bonus, but the Lifetime ISA offers several advantages. With a Lifetime ISA you can save up to £4,000 per year while the Help to Buy ISA only enables you to save £2,400 per year (£3,400 in year one). The Help to Buy ISA government bonus is capped at £3,000 but with the Lifetime ISA, the Government will keep topping up your contributions by 25% until your 50th birthday.

Also, the Lifetime ISA allows you to save cash and/or invest in stocks and shares, depending on what your provider offers. Given the current low interest rates on savings, stocks and shares can make your money work harder – although of course, investments can also lose value. For this reason investing in stocks and shares in your Lifetime ISA is not recommended for a house purchase if your time horizon is 3-5 years. Also, as stated earlier, you can only use a Lifetime ISA for a first house purchase 12 months after the date of the first payment into the account.

Remember, accounts are limited to one per person (rather than one per home), so two first-time buyers can both receive a bonus when buying together. If you have a Help to Buy ISA, you can transfer those savings into a Lifetime ISA in 2017, or continue saving in both, but you will only be able to use the bonus from one of the accounts to buy a house.

A Lifetime ISA can be an early introduction to the stock market

A stocks and shares Lifetime ISA is a great opportunity to experience the stock market from an early age and to understand what that entails. Many people keep their long term savings in cash when they could make their money work harder for them through investing. It’s certainly a lesson I wish I’d learned earlier in life. By investing in a stocks and shares Lifetime ISA, there’s an opportunity to see your capital grow, while also receiving dividends which then compound over the years. Of course, investments can also lose value, but the earlier you start, the stronger your chance of capital growth over the long term.


Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest. 

Enter your e-mail address to receive updates straight to your inbox

My Newsletter

You can easily unsubscribe at any time by clicking on the unsubscribe links at the bottom of each of our emails

About Author