The Lifetime ISA Explained – How Could It Help My Long-Term Savings?

Finding the thought of saving for a house deposit or, even longer term for a pension, daunting? You’re certainly not alone – Finder has reported that almost a quarter of Britons have no savings at all in 2023, and half have £1,000 or less.

If your goal is to buy your first home or prepare for your golden years, a Lifetime ISA (or LISA) could give you the boost you need, not only to get started but to accelerate your saving. Let us guide you through how it works.

How does the Lifetime ISA work?

It’s a long-term savings account that’s been designed specifically to help people aged between 18 and 39 save towards getting on the property ladder, or save towards their retirement. You can save up to £4,000 each tax year (a tax year runs from 6th April one year to 5th April the next).

But here’s the best part, which will really help your nest egg grow – the government will top up your account with a bonus of up to £1,000 every year until you reach the age of 50.

How does the Lifetime ISA Bonus work?

It’s really simple. You’ll get a 25% bonus (up to £1,000 a year) on the total you pay into your Lifetime ISA – excluding investment interest or growth. Money transferred into a Lifetime ISA from another ISA is also eligible for the government bonus too.

Here are a couple of scenarios to demonstrate just how much your savings could grow:

Saving for retirement:

If you open a LISA at age 18 and save the maximum of £4,000 per year until age 50, you could earn a government bonus of £32,000 and end up with £160,000 in savings.

So, that’s:

  • £32,000 – the 25% government bonus paid across 32 years of saving
  • £128,000 – the money you’ve contributed to your LISA

Saving for your first home:

If you open a LISA at age 20 and save the maximum of £4,000 each year for 10 years, you could earn a government bonus of £10,000. This would leave you with a house deposit totalling £50,000.

  • £10,000 – the 25% government bonus paid across 10 years of saving
  • £40,000 – the money you’ve contributed to your LISA

When do you get your LISA bonus?

The government bonus is added to your account every month – so, you’ll get 25% on top of what you’ve contributed for the month.

Are there any Lifetime ISA withdrawal restrictions?

There are. You can only withdraw your funds, including the government bonus, without incurring a government withdrawal charge…

  • to put towards the purchase of your first home, up to the value of £450,000, at any time from 12 months after you first start saving into the account
  • when you reach the age of 60
  • if you become terminally ill and have less than 12 months to live

So, if you were to regularly dip in to take money out, as you might with a standard cash ISA, you’ll incur a 25% charge on each withdrawal. This could ultimately leave you getting less back than you paid in.

Statutory exceptions and accounts closed within the 30-day cancellation period for newly opened LISAs won’t incur this withdrawal charge.

Can you use Lifetime ISA for house deposit and retirement?

Yes. Once you’ve used your long-term savings to purchase your first home, you can continue saving into your Lifetime ISA for retirement. And you’ll still continue to receive your 25% government bonus.

Can you transfer a Lifetime ISA?

Yes, and, thankfully, it’s not a complicated process either. You can transfer the LISA between ISA managers, there’s no limit on the amount you can transfer, and you won’t incur a withdrawal charge.

However, if you transfer it to another kind of ISA, i.e., a cash ISA, you’ll incur the 25% withdrawal charge – unless the transfer is made after your 60th birthday or you’ve declared you have a terminal illness.

You can also transfer your Help to Buy ISA, if you’ve opened one, in to a Lifetime ISA.

What if I’m not eligible to open an account?

If you fall outside of the 18 to 39 age bracket, unfortunately, you won’t be able to use the LISA to save for your first property or retirement. You can still make use of an ISA, such as a Stocks & Shares ISA , and use your tax-free savings allowance to save for your future.

Request an information pack or visit our product page to find out more about the Foresters Lifetime ISA and how we can help you save for your first home or retirement.

Tax rules may change and depend on individual circumstances. Contributions paid into a Foresters Friendly Lifetime ISA are invested in a fund which includes stocks and shares, the value of the plan may fall as well as rise and you may get back less than you have paid in.

The content of this article is for information purposes only and does not constitute financial advice. We do not offer financial advice. If you’re unsure as to the suitability of a product you should seek advice from a Financial Adviser. You may have to pay for this advice.