With Help to Buy: ISAs coming to an end this year, savers may think they’re losing out on a potential Government cash bonus. However, with a Lifetime ISA, savings will still attract the 25% Government bonus when used as a deposit on a first home or when saving for later life.
Savers must be between 18 and 39 to open a Lifetime ISA and must make their initial deposit before they turn 40, they can put up to £4,000 into the account each year, with amounts topped up by a 25% monthly Government bonus, up until the age of 50.
Bonus
The bonus can be significant and a big help for boosting a deposit, the table below illustrates how after five years savers would receive a £5,000 bonus if saving the maximum £20,000. If they save the maximum amount every year from their 18th birthday, until the day before their 50th birthday the bonus is £32,000.
| Total after saving (before bonus) | Bonus of 25% added | Total |
| £20,000 (5 years) | £5,000 | £25,000 |
| £128,000 (18 – 50) | £32,000 | £160,000 |
Case study
Kirsty, a 26-year-old from County Durham, opened her cash Lifetime ISA with Newcastle Building Society to save for her first home, hoping to save a deposit of around £12,000, with the additional intention of saving for later life.
Kirsty said: “The LISA suited us more than a Help to Buy ISA as the Government bonus is paid monthly and therefore contributes towards the deposit on our first home. With the flexibility of the payments the LISA offers, if we can afford to save more one month than another, we can do.
“The process was quick and easy and explained clearly. We applied online and made our initial deposit.”
Buying a house
If savers plan on using their Lifetime ISA to buy their first home like Kirsty, they need to be aware that all of the following must apply:
- the property costs £450,000 or less
- it will be the first home you will own
- you can only buy the property after having your Lifetime ISA open for at least 12 months
- you use a conveyancer or solicitor to act for you in the purchase – the ISA provider will pay the funds directly to them, you don’t withdraw the funds
- you’re buying your home with a mortgage rather than being a cash buyer
Pension savings
However, if being used to save for later life, it’s worth knowing that once customers turn 50, they will not be able to pay any more into their Lifetime ISA and therefore will not earn a 25% bonus. The account will stay open and savings will still earn interest. When they turn 60, customers can then withdraw the funds, including the bonus without the 25% penalty charge.
Savers can use their LISA for both buying their first home and later life saving because the full balance doesn’t need to be used for the house purchase.
Tax free
People should also be aware that they don’t pay tax on the cash, and all of the money taken out of their LISA for retirement is tax free, however it could affect other benefits that can be claimed.
Withdrawing cash
Savers can only withdraw from their Lifetime ISA penalty free if they’re buying their first home, or saving for later life (or in cases of terminal illness or death). Otherwise, customers will have to pay a 25% penalty, which means savers could walk away with less than they put in. Some examples are shown below of how much can be lost if a full amount is withdrawn:
| Paid in | 25% bonus puts it up to | 25% Penalty charge | Left after penalty charge | You lose |
| £800 | £1,000 | £250 | £750 | £50 |
| £4,000 | £5,000 | £1,250 | £3,750 | £250 |
The table below also shows that savers have to account for the penalty charge if wanting to withdraw a partial amount. The penalty charge means that a Lifetime ISA is only really suitable if customers want help buying their first home or to save for retirement.
| In the account | What you want to withdraw | What you would need to withdraw | What you have left |
| £1,200 | £200 | £250 | £1,150 |
More information
If you’re interested in finding out more about Newcastle Building Society’s Cash Lifetime ISA, visit www.newcastle.co.uk or you can visit www.gov.uk/lifetime-isa to find out more about Lifetime ISAs in general.
