What is a lifetime ISA?
Lifetime ISAs can help first-time home-buyers, says Paul Lewis, but there is a catch…
If your grown-up children want to buy their first home, saving for the deposit is usually the first step.
There is a simple way to get the Government to boost whatever they save. It is called a Lifetime ISA (LISA). As with all ISAs, any interest or growth is tax-free. But the big plus of a Lifetime ISA is that the Treasury adds another 25 per cent on to what the saver puts in.
That subsidy does come with a downside: if the money is taken out for the wrong reason – anything other than a deposit for a first home costing up to £450,000 with a repayment mortgage – then the Government snatches back the subsidy plus a bit extra.
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The arithmetic works like this. The saver puts in, say, £80.
The Treasury boosts that by 25 per cent, which is another £20, so there is £100 in the LISA.
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If the saver then withdraws the £100 for the wrong reason the Treasury takes back 25 per cent of the amount taken out, which is £25, leaving just £75 of the original £80. So the saver has not only lost the subsidy of £20 but also an extra fiver, which is effectively a fine of 6.25 per cent of the money saved.
A Freedom of Information request recently revealed that a total of £9 million had been taken back by the Treasury from people with a Lifetime ISA who had withdrawn their money and not used it to help buy a first home.
Most of that £9 million was the Treasury subsidy given in the first place, but nearly £2 million was the extra penalty.
People aged 18 to 39 can open a Lifetime ISA and they can pay into it until they reach 50. The maximum contribution is £4,000 a year, to which the Treasury will add 25 per cent, up to a maximum of £1,000 a year. No one else can pay into the LISA, but there’s nothing to stop parents or others giving money to the saver so they can put more into it.
Not all banks and building societies offer LISAs and the amount that goes in counts towards the total £20,000 a year that can be put into ISAs.
For more information visit gov.uk/lifetime-isa