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Thu 05 May 2016
What is it?
It’s a new way of saving for your first home, or for your retirement, and is one of several measures the government introduced in the Budget to encourage people to put some money aside.
What makes this ISA unique is it is only available to people between 18 and 40 and you will no longer be able to pay money into it once you are over 50.
It can only be used to for first-time purchases on houses costing less than £450,000, or alternatively you can wait until you are 60 and use it as a pension.
How does it work?
The most exciting feature of a Lifetime ISA is the government will give you a bonus just for putting some money aside.
For every £4 you save the government gives you £1, up to a maximum of £4,000 savings per year. This means if you saved £4,000 or more in a year the government will give you £1,000.
This bonus is tax-free and, because it is an ISA, you will also earn interest on the money in the account.
When will I get my bonus?
Bonuses will be paid in every year, so you will have to wait 12 months to see this benefit. However, if you are using it to buy a house, you can withdraw funds whenever you want.
If it is not for a house purchase, you will have to wait until you are 60. Access the money before then and you will lose your bonus, the interest earned on the bonus and pay a 5% fee. The government are looking into greater flexibility in this area, possibly allowing people to borrow from their savings. If you are diagnosed with a terminal illness, you will be allowed to withdraw funds before you turn 60.
When will it start?
Lifetime ISAs will be available from 6 April 2017, which gives you a bit of time to plan. In the next year you can expect a number of different providers to announce details of what interest rates they will be offering on this service, so it is worth doing some research to make sure you get the best deal.
I already have an ISA
You can have more than one ISA and pay into both, as long as you don’t go over the annual limit, which is currently £15,240 per year, rising to £20,000 in 2016/17.
What is important to remember is the Lifetime ISA is specifically designed for people saving for their first house, or putting money aside for their retirement.
There are also other restrictions, like the age limits, which are not part of standard ISAs.
Does this replace my Help-to-Buy ISA?
Short answer, no. However, you need to think carefully to make sure you are on the right product.
The key difference is the Lifetime ISA is valid for a house worth up to £450,000 anywhere in the UK, while the Help-to-Buy ISA is limited to £250,000 outside London.
This said, the Help-to-Buy ISA has no upper age limit and is probably the better option if you are looking at buying in the next two years. As long as you have saved £1,600, you can withdraw your money and claim the bonus straight away. You will have to wait until at least April 2018 to access the funds in a Lifetime ISA and collect the bonus.
If you are looking longer-term the good news is you can transfer your Help-to-Buy ISA into a Lifetime ISA.
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