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If you fancy getting a bonus just for saving money, as well as receiving tax-free interest on your savings, it could be something to think about.
A lifetime ISA is available to anyone aged between 18 and 39. You can use it you save up to £4,000 a year (until you’re 50) towards your first home, or to save for retirement. And every year, the state will add a 25% bonus of up to £1,000 to your savings, as well as earning tax-free interest on your savings.
However, if you choose to withdraw the money without buying your first home or before you retire – you will incur a penalty charge. Withdrawals have a 25% penalty, equivalent to a loss of just over 6%.
At first, the fact you’ve had a 25% bonus added and then a 25% penalty would seem to leave you back where you started. However, the maths doesn’t work like that…
For example, if you saved £1,000 and got a £250 bonus, you’ll have £1,250 total (ignoring interest, for ease). If you then withdrew it and closed the account, the 25% penalty would be £312.50. So you’d get £937.50 back.
In effect, the maths means that withdrawing for reasons other than buying your first home or retirement loses you 6.25% of what you contributed.
You must be 18 or over but under 40 to open a Lifetime ISA. But you can put in up to £4,000 each year until you’re 50.
However, you must make your first payment into your ISA before you’re 40 – this could be a deposit of as little as £1.
Once you open your LISA, you’re not locked in. You can change the provider or bank you are with – for example, if another bank is offering a better interest rate.
There are a few rules you need to take note of before you open your LISA to save for your first home.
A first-time buyer must be someone who has never owned a property anywhere in the world before. This includes owning a house or apartment abroad, or even owning a share in a home you might have inherited.
If you owned a company or had a trust that owned a residential property that you were able to live in, you would also not be considered a first-time buyer and therefore you will not be able to get the state bonus.
You can use your savings to help you buy your first home if all the following apply:
Buying with someone else
If the person you’re buying with has a Lifetime ISA, you can both use your savings and government bonus.
To qualify you must both:
If you have a Help to Buy ISA as well as a Lifetime ISA, you can only use the government bonus from one of them to buy your first home.
You can transfer money from a Help to Buy ISA to a Lifetime ISA. If you transfer money from a Lifetime ISA to a Help to Buy ISA you’ll have to pay the 25% withdrawal charge.
H3: Lifetime ISA when is the government bonus paid?
The lifetime ISA bonus will be paid between four to eight weeks after you pay money into your Lifetime ISA – but it could take up to ten weeks, depending on the date you pay in.
H3: How to open lifetime ISA
To open a lifetime ISA, you will need to find a bank or provider to open your account with. To do this, you can visit comparison sites such as Money Saving Expert t to find the best deals and compare the best interest rates. Each provider will have different procedures to set up your account
When you are ready to buy your first-home with your Lifetime ISA funds, ask your provider to transfer the cash directly to your solicitor/conveyancer. If you withdraw it to an account in your name, you’ll pay the 25% withdrawal charge.
All your savings, including the bonus, will be available to use at exchange.
However, the property purchase needs to be completed within 90 days of you sending savings from the LISA to your solicitor. If your purchase is going to take longer, either delay taking the money out of your LISA, or ask your solicitor/conveyancer to write to HM Revenue & Customs to get an extension on the 90-day limit.
But if your purchase ends up falling through – you won’t lose out. In this case, the funds will go back to the LISA account they came from. This won’t affect your annual contribution; you’ll still be able to contribute up to £4,000 that tax year (unless you already have).
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