Under 40? Earn £1,000 a year with a Lifetime ISA


If you’re under 40, you could earn up to £1,000 each year by using the new Lifetime ISA. Unfortunately, that counts out me and Mike, but I’ll run through the details for all the youngsters!

The Lifetime ISA will be available from next month – April 2017. It can be used either to save for a deposit for a first home or to save for retirement.

Who can open one?

You can open a Lifetime ISA if you’re aged between 18 and 40. Opening one will be similar to the procedure for existing ISAs. Savings into a Lifetime ISA will count towards the overall ISA limit for the year.

Government bonus

Sums saved in the account before your 50th birthday will earn a Government bonus of 25% of the amount saved.

The Government bonus will be paid on savings of up to £4,000 a year. Therefore, you can earn up to £1,000 a year from your Lifetime ISA. The bonus will be paid at the end of each tax year.

Save for your first home

The Lifetime ISA can only be used to save for a deposit on a first home or to save for retirement. However, you must hold the Lifetime ISA for at least 12 months before you can make withdrawals that include the Government bonus.

The savings, together with the Government bonus, can be put towards the purchase of a house in the UK costing up to £450,000. Where a house is purchased jointly, each purchaser can use savings from a Lifetime ISA, together with the Government bonus.

If you already have a Help-to-Buy ISA, you can either keep it and use it to save for a first home or transfer it into a Lifetime ISA. It is possible to have both a Help-to-Buy ISA and a Lifetime ISA, but only the Government bonus from one of the accounts can be used to buy the first home.

Trap

The bonus is only available to first time buyers.

Save for retirement – and earn a bonus of up to £32,000

The other purpose of the Lifetime ISA is to save for retirement. If you save £4,000 a year from age 18 to age 50, you will accrue savings of £128,000 (before interest) and earn a Government bonus of £32,000, giving you a savings pot of £160,000 (plus interest). The savings and the Government bonus can be withdrawn from age 60.

Beware other withdrawals

The aim of the Lifetime ISA is to encourage long-term saving for specified purposes. Although you won’t be prohibited from making withdrawals for other purposes, you will lose the Government bonus on any withdrawals you make for other purposes. In addition, you’ll suffer a 5% charge. So, if you save £100 either towards a first home or retirement, that £100 will be worth £125 (plus interest). However, if you use the savings for other purposes, be warned, you will only get £95 of your initial £100 back (plus any interest earned).

Practical tip

Use a Help to Buy ISA for your first home and the Lifetime ISA to save for retirement. For other savings, choose a different account.

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Any questions?

If you’d like a meeting or a Skype call with a Liverpool accountant to discuss this, please give us a ring on 0151 380 3800 or drop us an email at [email protected].

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Added by Jon Davies
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