When researching different savings accounts you’ve probably come across ISAs, and more specifically the Lifetime ISA (LISA). The lifetime ISA is a cash ISA which means you save money into it, rather than a stocks and shares ISA. A LISA encourages you to save by applying a bonus to your account, as well as a normal interest rate. Currently, the bonus is 25% of everything you’ve saved that financial year, up to £4,000. So, if you put £4,000 into your Lifetime ISA, you’d receive a bonus totalling £1,000. This can make a huge difference to your savings balance! Lifetime ISAs can only be used towards first time property purchases and retirement, although you would also be able to withdraw the funds without penalty if you have a terminal illness.
Obviously, the 25% government bonus is a fairly big incentive to open a lifetime ISA, but there’s little reason to get one if you aren’t a first time buyer or saving for retirement. You can open a LISA at any age between 18 and 39, and bonuses will be paid until the age of 50. So, if you opened your account at 18 and saved the maximum £4,000 every year, you could receive £32,000 in bonus payments.
You can apply for a lifetime ISA online and in some cases, you can submit an application in-branch as well. Opening an account online is relatively quick but you will need proof of identity among other things. Not all banks offer lifetime ISAs and it’s worth reading LISA comparison guides to help you choose which bank or building society will provide the right account for you.
There’s no point paying more than the maximum £4,000 into your lifetime ISA because you won’t receive any further bonuses – and in some cases, it might not even be possible. You can open a normal savings account for any extra funds you want to save, but it’s a good idea to find an account with a good interest rate. You can either pay the £4,000 into your LISA in one lump each tax year, or in flexible repayments that align with your income payments. As your lifetime ISA savings are subject to withdrawal penalties, you should only save what you can realistically afford.
If putting £4,000 into savings each year sounds overwhelming or impossible, you might want to consider the Help to Save scheme which aims to encourage low-income earners to save by applying bonus payments.
You can withdraw your lifetime ISA funds to purchase your first house or when you retire, and you are over the age of 60. The only other exception is if you are suffering a terminal illness with less than 12 months to live – you may have to provide evidence of this. When buying your first house, the funds will be released at the exchange of contract, and you can contact your lifetime ISA provider or mortgage advisor for more details.
If you withdraw your funds for any purpose other than buying your first house or retiring, you have to pay a 25% withdrawal charge. The withdrawal charge means you lose your government bonus and a proportion of the amount you have saved. For example, if you’ve saved £8,000 into your LISA over the last 2 years, you’ll have received government bonuses of £2,000, bringing your balance to £10,000. If you wish to withdraw that £10,000, the withdrawal charge is £2,500 at 25%, so you would receive £7,500. This means you lose the £2,000 bonus and £500 of your own savings.
So, to answer the question as simply as possible: yes, if you are a first time buyer aiming to buy a house in more than 12 months’ time; or if you want to increase your retirement savings. The government bonus of 25% is one of the biggest savings bonuses available and over a few years can hugely advance your savings. However, while the maximum amount you can save each year is £4,000, you should only transfer this much annually if you can afford to, because you won’t get the same amount back if you have to withdraw prematurely.
If you aren’t sure what you’re trying to save towards, it might be worth looking at other options – at least in the meantime – so you can continue to save effectively while you decide. Premium bonds might be a possible saving option if you’re often tempted to spend your savings – although there isn’t a consistent interest rate or guaranteed bonuses, you could win more money than you might ever earn in interest with a typical savings account.
If you decide to open a lifetime ISA but you’re still a little confused, always ask the bank or building society for more information before signing the agreement. LISAs can help you on your savings journey but as with all money management, it shouldn’t cause you unnecessary stress or anxiety.
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