AD: What Is A Lifetime ISA & How Do They Work?

This is an advert with The Nottingham but all thoughts and opinions, as always, are my own.

I know from personal experience that trying to save for a house deposit can be incredibly difficult for young people nowadays. It’s really daunting to think that you, in most cases, need such a big chunk of money in savings to think about applying for a mortgage and it can be hard to know where to begin. But this is where the Lifetime ISA, also known as LISA, can be really handy.

What is a Lifetime ISA?

A Lifetime ISA is a type of individual savings account, meaning that it has to be opened by one person, rather than a joint account which can be shared by a couple. The Lifetime ISA has been created to help first time buyers save for a deposit and get on the property ladder, or alternatively, you can also use the Lifetime ISA to save for your retirement. This is great for my boyfriend and I as we’re both able to save individually into our accounts and then both use our LISAs when it comes to buying our first home together.

You can open a Lifetime ISA between the ages of 18 and 39 and save a maximum of £4,000 each tax year into your Lifetime ISA, and on top of this, you get a tax-free bonus from the Government of 25% of whatever you save up to a maximum bonus of £1,000. In simple terms, for every £4 you put into the account, the Government will give you £1 free money. Yep, free money. Sounds pretty good, right? This means that if you can put in £4,000 a year you will get the maximum bonus of £1,000. This is so helpful when saving a large amount of money for a deposit and honestly, makes the whole process of saving feel a lot less daunting for me personally.

For example, if you opened a Lifetime ISA at 18 and didn’t withdraw any money from it to buy a first home, you could potentially gain up to £32,000 if you paid in the maximum amount of £4,000 per tax year until you were 50 years old. You would then be able to withdraw the money at age 60 for your retirement or buy a first home at age 50! To me, it’s a no-brainer. And I wish a product like this had been around when I was 18, even though I wouldn’t have even been thinking about buying a house, it’s a great way to start investing in your future without committing to saving a certain amount of money per month and still getting something back.

Your maximum savings in this account could be £5,000 per tax year, consisting of your £4,000 savings and £1,000 Government bonus. The money in the Lifetime ISA account also earns interest, at the moment; at the time of this blog post going live, The Nottingham offers the best high street interest rate at a variable 1.25% (this is both the tax-free and AER interest rate – check the smallprint for more on what this means if you’re not sure). You can see how it can be easy to build up a decent deposit using a Lifetime ISA!

Are there any restrictions to the Lifetime ISA?

Once you have deposited money into the account, there are very limited reasons you can then withdraw it again other than for a property purchase or retirement at age 60 without a penalty. For spenders like me, this is a really great way to save as I physically cannot access the money without incurring a penalty that I wouldn’t want to pay (which we will come onto in a minute). It means that I’m really thinking about how much I can afford to save each month, and to help this I’ve even started creating a monthly budget to see what I could save money on (clothes, it’s definitely just clothes…).

If you need to access the account for most other reasons, you will incur a penalty from the Government. This is currently 20% increasing to 25% after Monday 5^th April 2021. This charge is also applicable if you make a withdrawal before you’ve had the account open for 12 months. This could mean that you could get back less than you put in.

For us, not being able to access the money was a great incentive alongside the Government bonus and earning interest. It means that we can create a separate savings pot purely for our first home that we cannot touch. It simply sits there earning interest, doing its own thing, and accumulating the Government bonus, until we are ready to put down a deposit on a house. The withdrawal charge, I think, works as a really good deterrent. I’ve not even considered the possibility of moving any money out of my Lifetime ISA, purely because I know I would lose a considerable amount of that hard-earned and saved cash.

How much can you save in a Lifetime ISA?

How much you save depends on how much you put into the account each month. There’s no minimum amount that you have to pay in monthly, so you can pay in dribs and drabs as and when you can afford to – you don’t need to pay it in a lump sum each month. This can be super handy if you’re a student, or if you work varying hours each month, as you’re not tied to saving a set amount. You also don’t have to pay in money every month if you cannot afford to. Alternatively, you could deposit a lump sum at the beginning of the tax year and then forget about it until the next tax year!

The maximum amount you can put into the account each tax year (April 6th – April 5th) is £4,000, but this can be spread out across the whole year if you need to which is roughly £333 per month if split equally.

Am I eligible for a Lifetime ISA?

To be eligible to open a Lifetime ISA, as I’ve said, you must be aged 18-39 and live in the UK. You can save and continue to earn the annual bonus until the age of 50. If you are intending to use the Lifetime ISA to save for your first home, you can’t currently own or have previously owned a property or been named on a mortgage anywhere in the world, including inheriting a property. This means that you’ll be officially classed as a first-buyer!

It is also worth reiterating that, as long as you are both eligible, both partners in a couple can use a Lifetime ISA. You can both individually save into your accounts and use both LISAs towards your first home. This can be a really great way to build up your deposit as you will both be utilising the Government bonus and the interest rate. This means you could, as a couple earn up to £2,000 per tax year for your first home deposit.

Why we chose to use Lifetime ISAs

After doing a lot of research into different savings account and schemes, as a couple we chose to open Lifetime ISAs as you do not have to put a set amount of money into the account every month. In fact, you don’t have to put in anything at all each month if you don’t want to. Of course, you only earn the annual Government bonus on your deposits in that year but any funds in the account would continue to earn interest. This suits us as a couple really well as our earnings are quite flexible at the moment with the whole lockdown situation, and me being on furlough for a while. We are hoping to buy our first home in the next 3-5 years, so we were looking for more of a long-term savings plan as well, meaning that the Lifetime ISA was ideal for us.

There is also a higher limit on the price of the home you are purchasing with a Lifetime ISA when compared to previous schemes such as the Help to Buy ISA. The maximum value of the house you can buy using a Lifetime ISA is £450,000, which is perfect to us as we want to move to quite an expensive area between both our families as we are currently long distance.

How do I get a Lifetime ISA?

You can apply for a Lifetime ISA with The Nottingham online, or in your local branch once we are a bit more back to normal! You will need to open the account with a minimum deposit of £10 and you’ll need your National Insurance number ready as well as other personal details for when you do apply online.

Have you heard of a Lifetime ISA before, or opened one yourself? Let me know your experiences in the comments, or let me know if you have any questions! How have you found saving for a house yourself?

The Nottingham will pay your interest annually and free of UK income tax. Your tax treatment will depend on your individual circumstances and may be subject to change in the future. The tax treatment of ISAs may also change. AER stands for Annual Equivalent Rate. It shows what the interest rate would be if the interest was re-invested in the account each year.

Nottingham Building Society, Nottingham House, 3 Fulforth Street, Nottingham NG1 3DL, is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority; registered No. 200785.