At London Money, we’re big supporters of the first-time buyer and we love when new initiatives look like they will help future homeowners on their journey. That’s why we’ve been so excited about the introduction of Lifetime ISAs (Individual Savings Accounts).
However, it looks like our enthusiasm is unmatched by around 99.5% of those saving for a deposit, as just 150,000 Lifetime ISAs have been opened in their first year on the market. That means little more than 0.5% of first-time buyers are taking advantage of the benefits available, including a guaranteed annual government bonus of up to £1,000. (Source: Money Box via The Telegraph)
No-one knows truly why the uptake has been so slow. It could potentially be due to the limited number of Cash Lifetime ISAs on the market. With Cash being the preferred method of short-term savings, such as those used to buy a home, these products could be being overlooked for more well-known account types.
It’s certainly not due to a lack of publicity. However, if you have managed to miss the memo, or perhaps need a little bit more information about the Lifetime ISA, here’s our explainer:
Lifetime ISAs explained
It’s likely you will have heard them mentioned a lot, if you frequent first-time buyer blogs and resources, but they have left you wondering about the finer details and what they can offer you in terms of helping to save for your mortgage deposit.
So, let’s take a closer look and answer those burning questions.
1. Who can open a Lifetime ISA?
To open an account, you must be aged between 18 and 39 and be a UK citizen. Crown Servants and their spouses are also eligible.
2. What are the restrictions?
There are two main restrictions applied to Lifetime ISAs:
- Deposits: Each year, you can deposit a maximum of £4,000, this is also included in your Annual ISA Allowance of £20,000, meaning that you can deposit up to £16,000 in other ISA accounts, if you wish. However, you can only pay into one Lifetime ISA, and it is only possible to open a new Lifetime ISA once per year.
- Age: The account must be opened before you turn 40 and you will no longer be able to deposit money into the account after your 50th birthday, though the account will remain open until you either withdraw money or die.
3. What is the government bonus?
Probably the most attractive feature of a Lifetime ISA to first-time buyers. At the end of every tax year, a government bonus, worth 25% of your deposits for that year is added to your account. That means, if you put the maximum of £4,000 into the account, you will receive an additional £1,000 of free money.
4. Withdrawals
Withdrawing money from your Lifetime ISA before your 60th birthday comes with no restrictions if it will be used to secure the mortgage on your first home, where:
The house is worth less than £450,000
The money is taken out of the account by a conveyancer or solicitor directly
The account has been open for a minimum of 12 months
Alternatively, you can access your money once you reach the age of 60, or if you are diagnosed with a terminal illness and your life expectancy is less than one year. You can also transfer your balance to a new Lifetime ISA under another provider without incurring a penalty.
Making withdrawals for any other reason, or before the age of 60 will incur a 25% penalty, which will counter any bonuses you have received, as well as eating into the original deposit.
Capital held in your Lifetime ISA is tax-efficient, and it is rare that withdrawals incur tax either.
5. What types of Lifetime ISA area available and who are they for?
Like most ISA types, both Cash and Investment accounts are available. However, they each have their distinct advantages and disadvantages which make them better suited for different purposes:
Cash Lifetime ISA’s are simply a tax-efficient way to hold your savings as you prepare to buy a home. The account has the added appeal of the annual government bonus, but you will not see growth or returns on your capital as it is not invested. The lack of risk associated with this type of ISA means that they are usually best positioned for those who are saving toward the deposit on their first home. There is no question what the account balance will be when you access it, meaning that you will not lose out on your dream home due to a sudden fall in investments.
Stocks and Shares Lifetime ISAs offer a tax-efficient wrapper for long-term investments. Of course, there is an element of risk with this account type and the value can fall, as well as rise. For this reason, a Stocks and Shares Lifetime ISA is often more suitable for long-term objectives, such as retirement. Although, a workplace pension should generally be first port of call, due to employer contributions and the added benefit of tax relief.
Could a Lifetime ISA be right for you?
If you are planning to buy your first home soon and like receiving free money, then it may well be!
However, we can only really let you know if we recommend a Lifetime ISA for you, by talking to you one-to-one. So, to get started and find out about all the options facing you as you venture into the housing market, feel free to get in touch with us on 0207 808 4120.