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30th November 2021

Lifetime ISAs: Who are they for?

,A Lifetime ISA, also known as a Lifetime individual savings account, is ideal for individuals looking to invest in their first home or retirement plan. The utility of a Lifetime ISA across an individuals lifespan is what has given this account it’s name. The account was introduced by the UK government in 2017 to maximise individuals potential for future savings.


What is a Lifetime ISA?

A Lifetime ISA, or LISA, is a savings account that can be opened by anyone aged between 18 and 39. The account offers a saving threshold of £4000 per year. The government will then contribute an additional 25% of the amount you have saved. This means that the Lifetime ISA accounts provide a £1000 bonus of tax-free cash.

The account is limited to be used either in the purchase of your first home, up to the value of £450,000, or redeemed as a retirement fund after you reach 60 years of age. An additional bonus of the account  you can keep saving within the account to use towards your retirement fund even after using it to purchase your first home. You don’t have to choose between the function of the account or worry about losing access to the saving potential after purchasing a home.


What you should know about Lifetime ISAs

  • You are not tied to one provider

After setting up your Lifetime ISA account with your chosen provider, you won’t find yourself locked in with them indefinitely. Much like plenty of other Cash ISAs and savings accounts, Lifetime ISAs and their providers will face fluctuations in interest rates. This means, in order to earn more on your savings, switching to a different provider could be more beneficial.

All of the money held within a Lifetime ISA grows with interest. This includes the 25% government bonus paid each month. This means the more you save, the more contributed by the government and the more that could be gained via interest if you transfer between providers with the highest interest rates.

  • There are penalties for not using the LISA for its intended purposes

The government bonus scheme for the Lifetime ISA was initiated with the purpose of helping first time buyers and allowing the aging generation to benefit from their savings. This means, if you choose to remove the money from the account for reasons other than property purchase or retirement, you’ll be hit with a 25% penalty.

This penalty removes the bonus, as a well as a portion of the money that you placed within the account. For example, if you deposited a saving of £1000. You would receive a government bonus of £250 on this amount at the end of the tax year. If you then find yourself in a tight situation and require the funds, the 25% penalty would cut £312. This would leave you with a total withdrawal of £937.50. The more you have saved within the account, the more you could be at risk of losing. Therefore it is important to account for future potential financial requirements and to ensure that the savings made within the Lifetime ISA can be left until the withdrawal criteria is met.

  • You can have a Lifetime ISA and Help-to-buy ISA at the same time

There is currently a £20,000 overall ISA limit per tax year. This means you can have several ISAs that you contribute into with a combined maximum limit of £20,000 during the 2021/22 tax year. This means you could invest the maximum of £4000 into the a Lifetime ISA and still save within other cash ISA accounts.

You are even able to hold both a Lifetime ISA and a Help-to-buy ISA at the same time. However, you will only be able to redeem the first time buyer bonus from one of these accounts. The most logical solution would be to use the Help-to-buy ISA to assist you in your purchase of a home and use the Lifetime ISA to save for your retirement.

  • The maximum bonus amount is £33,000

Whilst a Lifetime ISA can be opened by anyone aged between 18 and 39, the account can be contributed into until your 50th birthday. If opened as soon as you are eligible, this provides 32 or 33 years of savings. This will depend on where you birthday falls within the tax year. However, during this time, if the maximum amount of savings is deposited each year, the government bonus would contribute £33,000. In total, the amount of savings and bonuses would come to £165,000, plus interest.

This amount can then be redeemed after the age of 60. Once redeemed, there are no limits on the use this money. There is no longer a withdrawal charge for part or whole withdrawals.


Lifetime ISAs for first-time buyers

As mentioned, the two designated purposes for a Lifetime ISA is to contribute to the purchase of your first home, or to fund your retirement. The savings and bonuses can be used to fund the purchase of your first property. You may use it to cover the costs of purchasing a house, to cover the exchange deposit, or to pay off a chunk of the mortgage. The overall goal is to offer first-time buyers an accessible way to access the property ladder.


Who is classed as a first-time buyer?

It is critical for young savers to understand whether or not they are considered a first-time buyer before investing their money into a Lifetime ISA. The money within the account can only be accessed by eligible first-time buyers or those at retirement age. If you saved a considerable amount within a Lifetime ISA, without realising your status as a first-time buyer, you could lose large amounts of your investment if you withdraw the amount outside its intended use.

Eligible first-time buyers are individuals who have never owned a property. This includes properties owned in and outside of the UK. Properties that were inherited, or that you had a share in, even if it was sold. It also includes residential properties that were owned by a company that you are the owner of. To benefit from the Lifetime ISA, you must never have had ownership or shares of a property.


How to access the savings

By meeting the eligibility criteria as a first-time buyer, the full amount within your Lifetime ISA can be contributed towards the purchase of your first property. You can’t just withdraw this money yourself however. It is important that you utilise the services of your conveyancing solicitor to officially access the amount and redeem your status as first time buyer. Withdrawing the money incorrectly would lead you to face the 25% penalty for invalid use.

The process of accessing your money during the purchase of a house is fairly simple, once you know how. The first step is to receive a mortgage decision in principal to demonstrate that you could afford the mortgage on a particular property. You are then equipped to make an offer on a house and begin the mortgage application process. During this period, you will likely want to appoint a conveyancing solicitor to take care of the transaction. After instructing them for the exchange of property, you should inform your solicitor that you wish to redeem the first-time buyers bonus from your Lifetime ISA account.

At this stage, you should ask your LISA provider to transfer the funds directly to your conveyancing solicitor. Both you and your solicitor will have to complete a form to determine your eligibility and grant consent to release the funds. The property purchase then needs to be completed within 90 days in order to access your funds.


Additional information regarding Lifetime ISAs and First Time Buyers

  • What happens if the property transaction falls through?

After requesting the funds from your LISA provider, you may be concerned if the sale of the property falls through. However, there’s no need to worry, no matter the circumstance of your transaction falling through. Your solicitor is able to return the exact amount of your savings to the Lifetime ISA account. This enables you to redeem the funds once again and you will keep your status as first-time buyer.

  • You can use more than one Lifetime ISA to purchase a property

If you intend on purchasing a property with a partner, you could benefit from additional government bonuses. Whilst the yearly maximum deposit for a Lifetime ISA account is £4000, each individual is eligible to hold an account. This means you can both make savings into the account and combine the total to contribute towards the purchase of a property.

This combination will only work if both parties meet the criteria of being first-time buyers. As mentioned above, if your partner has previously owned property, they lose their eligibility. This means that they will not be able to use their LISA savings of bonus to contribute towards the purchase.

  • The account needs to be open for more than a year

This is crucial when using the funds for the purchase of a house. The Lifetime ISA account must have been open for at least 12 months before it can be used in the purchase of a property. If you open a LISA and intend to purchase a property during the same year, you should consider saving your money elsewhere.

  • The sooner you open a LISA account, the better

Even if you don’t have any savings yet opening a Lifetime ISA account sooner is far more beneficial. If you definitely intend to purchase a house, opening the account allows you to start the clock.  As mentioned above, your account needs to be open for more than one year. This allows you to redeem the savings and bonuses within the purchase of a property. Opening the account with just £1 can be advantageous. If you have £4000 to deposit by the end of the tax year, you could receive the lump sum of £1000 bonus during one month.


Final Thoughts

As a first-time buyer, lifetime ISAs can be greatly beneficial. The account offers a 25% bonus on yearly savings of up to £4000. This amount, plus interest accrued can be redeemed on property purchases of up to $450,000. This creates the housing market to be more accessible for first time buyers. As well as offering a rewarding and beneficial reason to start saving. Open a lifetime ISA soon to start the journey towards your first home. Or, instruct a licensed conveyancing solicitor to acquire the bonus from your LISA to purchase a property.