A Lifetime ISA is a relatively new type of savings ISA introduced by the Government in 2017. They allow you to make savings for later in life, but can also be used when buying your first home. By saving your money in a Lifetime ISA, the Government will give you an additional 25% bonus to your savings.
How they work…
A Lifetime ISA can be opened by anyone between the ages of 18-39, and are offered by most mainstream banks and building societies. You can save up to £4,000 into your Lifetime ISA each year until you reach the age of 50, to which the Government will then add a bonus of 25%. This bonus is paid monthly, calculated based on the amount you had deposited in the preceding month.
For example, if you were to save £100 every month for a full tax year, for a total of £1,200, the Government would pay in an additional £25 each month. This would leave you with an overall total of £1,500 saved in the ISA by the end of the year.
However, you are unable to make any withdrawals from your Lifetime ISA until the age of 60, and will have to pay a penalty fee should you do so any earlier. This fee is 25% of the amount withdrawn. Whilst this may first appear to be a case of simply re-paying the bonus you received, you will also actually end up losing some of the money you saved yourself, as the percentage is calculated on top of the bonus payments already made.
To use the same example as above, if you wanted to withdraw the full £1,500 in the Lifetime ISA, you would pay a 25% penalty fee of £375, leaving you with £1,125. Not only does this remove all the extra savings provided by the bonus, it is also less than the £1,200 of your own money that you saved in to the account yourself. You cannot make any withdrawals without paying this penalty until you reach the age of 60, or in the event you are diagnosed with a terminal illness.
Buying a Home
The one exception to this rule however is for buying a property. Provided you are a first-time buyer and are purchasing a property for less than £450,000, you are able to use the savings in your Lifetime ISA, including the bonus, to buy your first home without any penalty. This can be either the full balance of your ISA, or a partial amount. You will need to have been saving into your Lifetime ISA for at least 12 months before you are able to use the savings penalty-free, so keep this in mind when planning your purchase.
Rather than withdrawing the funds yourself, you will need to arrange for your conveyancer to apply for the money from the ISA provider as part of the conveyancing process. The funds would be paid upon the exchange of contracts, meaning you can use the full balance, including your bonus, towards the deposit on the property.
If you are buying a property in joint names with someone else, then you may both use your Lifetime ISAs to combine your savings and purchase the property together. The same caveat applies that you must both be first-time buyers to do so, however. If only one of you is a first-time buyer, then only that person can use their Lifetime ISA towards the property purchase without paying a penalty.
The Lifetime ISA can also be used in conjunction with other government housing initiatives, such as the Help to Buy equity loan scheme, and when purchasing a Shared Ownership property, making it a good way of purchasing a property no matter your circumstances. It may only be used for the initial purchase of the property itself however, meaning you cannot use the savings later down the line to re-pay the Help to Buy loan or increase your share in the property.
If you are planning on purchasing a property and have any queries about how to use your Lifetime ISA, please do not hesitate to contact us. Our conveyancing team are very familiar with the ISAs and would be more than happy to assist you.
For more information on Lifetime ISAs, the Government provide a guide which goes into more detail at the following link: https://www.gov.uk/lifetime-isa