Buying your first home is exciting. But saving the deposit for your first home may seem more like a far off dream. Could a Lifetime ISA help you realise your dream more quickly? Here we explain what you need to know in order for you to take advantage of your options.
What is a Lifetime ISA?
An ISA (Individual Savings Account) is a tax-free way to save or invest.
A Lifetime ISA (LISA) is a government supported savings initiative designed to help you at two specific points in your lifetime:
- when you want to buy your first home or
- when you retire
It is the latest member of the ISA family - joining cash ISAs, stocks and shares ISAs, Innovative Finance and Junior ISAs
Who can open a Lifetime ISA?
You can only open a LISA if you are:
- over 18 years old,
- under 40 years old and
- a UK resident taxpayer
Who can apply for a Metfriendly Lifetime ISA?
To apply for a Metfriendly LISA you will also need to be in the police family:
- Serving, former or retired Police Officers
- Serving, former or retired Police Staff
- Serving, former or retired PCSOs
- Special Constables and Volunteers
- Police contractors
- Immediate family members of all the above groups, as well as partners
For more detailed information about who membership is open to see our eligibility criteria.
How much can you save?
If you are under 40 you can open and deposit up to £4,000 per year until your 50th birthday.
If you invest the maximum £4,000 a year into a LISA you will have another £16,000 allowance to invest or save in other ISAs.
The annual ISA limit for 2017/18 and 2018/19 is £20,000 for all ISAs.
What is the government bonus?
The government will add a bonus of 25% to any savings. So, for every £4,000 you save the government will contribute £1,000.
It is important to remember that all tax treatment, government bonuses and terms and conditions regarding government penalties are based on current practice and may be changed by legislative acts at any time.
How is the money invested?
Like ordinary Individual Savings Accounts (ISAs) the money can be invested as cash or in stocks and shares. The Metfriendly LISA is invested in in a balanced mixture of equities, bonds, cash and property. So you have the potential for a higher level of return than cash, but with lower risk than investing entirely in stocks and shares.
Using your Lifetime ISA to buy your first home
The savings can only be used without penalty if you are a first-time buyer. In other words you must not have owned a property before.
The property cannot cost more than £450,000. This is more generous than the Help to Buy ISA, which is limited outside London, but £450,000 in the capital.
Two people can each use their own LISAs to buy a house together, each receiving a 25% government contribution and therefore potentially doubling its effect.
You should also be aware that a house bought through a LISA cannot normally be rented out.
Using your Lifetime ISA to help fund your retirement
Once you are over the age of 60, you can withdraw your money from a LISA and use it for whatever you like. All money taken out will be tax-free.
It is different to a pension. A pension is tax free when you pay into it, so it is the equivalent to the government’s contribution of 25% to a LISA for basic taxpayers, and both products grow in a virtually taxfree environment. However, while a pension is taxable on paying-out (apart from the tax-free cash element), all of a LISA payout is free of tax – provided you keep within the rules for withdrawals (see below).
A LISA should not be seen as an alternative to a pension as if you pay into a workplace pension you will also receive employer contributions. This means you and your employer both pay towards your pension.
The LISA should be viewed more as an account to supplement your pension savings.
Withdrawing from your Lifetime ISA
You have the choice to use the savings to buy your first home worth up to £450,000 or continue paying into it until you turn 60. For both options you can withdraw your money (including the 25% government bonus) tax-free.
However, if you withdraw your money before you are 60 for any other reason than to buy your first home (costing less than £450,000) you will pay a 25% penalty to the government. This effectively includes reclaiming the bonus and the growth on the bonus.
So for example if you save £4,000 into a LISA during the 2017/18 tax year and qualify for a 25% bonus, your total balance is £5,000. If you withdraw £5,000, £1,250 is deducted (25% of £5,000 = £1,250) meaning you will only receive £3,750*.
The exception to this is if you’re diagnosed with a terminal illness, you can withdraw all the funds (including the bonus) tax-free and penalty-free, regardless of age.
Transfers from other ISAs into a Lifetime ISA
You can transfer any other ISAs you have into the LISA, up to the maximum of £4,000 per year to take advantage of the 25% government bonus.
* Ignoring other growth and charges.