Invest in a Lifetime ISA
In previous posts, I spoke about ISAs and Junior ISAs. If you want to invest your money, free from UK income tax and capital gains tax, AND get free money, then the Lifetime ISA (LISA) may be for you.
The purpose of a Lifetime ISA
The purpose of the LISA is to help a person buy their first home up to £450,000 or to invest for retirement.
Who can open a Lifetime ISA?
You can open a LISA if you are between 18 and under 40.
You must be a resident in the UK, unless you’re a crown servant (for example, in the diplomatic service), their spouse or civil partner.
What you can invest in
You can save cash and/or invest in stocks and shares in your Lifetime ISA.
Annual Lifetime ISA limit
The annual limit is £4,000 per UK tax year. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per UK tax year. The LISA is part of the overall £20,000 annual ISA allowance.
When to pay into the Lifetime ISA
You must make your first payment into your LISA before you’re 40 and you can continue to pay into the LISA until the day before you are 50.
Restrictions on contributions
Once you reach 50, you cannot contribute to the LISA nor receive the 25% government bonus.
Withdrawing money from the Lifetime ISA
If you don’t use the money to buy your first home, you can access the money once you are aged 60.
Additionally, you can access the money if you are terminally ill, with less than 12 months to live.
Furthermore, you can take some or all your cash out of a LISA before age 60 even if you’re not buying a property. However, you will be charged 25% of the amount withdrawn.
Transferring money from a LISA
If you decide to transfer your LISA to another type of ISA before you are 60 years old, you will pay a 25% penalty. The transfer should take about 30 calendar days to complete.
Examples of investing in a Lifetime ISA
Example 1
Jane is 25, a first-time buyer and wants to save for a deposit.
She opens a LISA and invests the full £4k per UK tax year plus the government bonus of £1k.
At 8% return for 6 years, Jane would have saved £38k.
Jane, aged 31, could aim to buy a £350k home with a 10% deposit of £35k.
Example 2
Tom is 30, a first-time buyer and wants to save for a deposit.
He opens a LISA and invests the full £4k per UK tax year plus the government bonus of £1k.
Tom later decides he doesn’t want to buy a house but continues investing £5k (£4k + government bonus of £1k) in the LISA until the day before he is 50.
He cannot contribute any more money to the LISA once he reaches 50, nor will he get the 25% bonus, so he leaves it there growing tax free until he reaches 60.
Assuming an 8% return over 30 years, Tom will have £515k in his LISA account.
At age 60, Tom can withdraw the full amount, £515k.
In Summary
If you want to invest free of UK income and capital gains tax and;
- invest for your first home
- or for retirement
then the LISA may be for you!
Thanks for reading!
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DISCLAIMER: Inquisitive Finance operates on principles of exchange of knowledge, ideas and opinions and learning in the community. Your decisions are entirely your own responsibility and I am in no way responsible for your actions. I am not a financial advisor. Whilst I strive to provide accurate and up to date information, I make no warranties or representations as to the accuracy or completeness of this information. Use common sense, do due diligence and where necessary, use the services of a licensed financial advisor, before making any financial decision and/or transaction.
