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The Lifetime ISA is an initiative launched by the government to encourage those aged between 18 and 39 to put money aside for their first home or retirement — and receive a 25% government bonus on their contributions.

The Lifetime ISA launched on 6th April 2017. UK residents aged between 18 and 39 can open one and deposit up to £4,000 per year until their 50th birthday.

The good news: for every £4,000 you contribute, the government will contribute £1,000 — in other words, an annual 25% bonus.

You can use your Lifetime ISA to buy your first home worth up to £450,000, or keep it until you turn 60. For both options, you can withdraw your money, including the 25% government bonus, tax-free.

Is it a cash or stocks and shares ISA?

The Lifetime ISA is available as a cash ISA or a stocks and shares ISA (although Nutmeg only offers a stocks and shares Lifetime ISA). You’re allowed to hold a Lifetime ISA alongside other cash, stocks and shares, or Innovative Finance ISAs, all within your annual ISA allowance of £20,000.

If you contribute the maximum £4,000 into a Lifetime ISA in this current tax year, you’ll have another £16,000 ISA allowance to invest or save in other ISAs before the end of the tax year on 5 April.

Can I access my money?

If you need to access your money before you are 60 other than to buy your first home costing less than £450,000 or for a terminal illness, you’ll pay a hefty fine. You’ll have to pay a 25% government withdrawal charge (the withdrawal penalty will be temporarily reduced from 25% to 20% from 6 March 2020 till 5 April 2021 due to coronavirus) meaning you’ll get back less than you’ve put in.

The Lifetime ISA is good in that you’re able to access your money (unlike with a pension), and it’s always tax free, but if you’re not planning to buy your first home, you need to be fairly certain that you can leave the money until you’re 60.

If accessing the money in your Lifetime ISA before you’re 60 for other reasons is important, you might be better off with an ISA.

Can I transfer other ISAs into a Lifetime ISA?

You can transfer any other ISAs you have into the Lifetime ISA, up to the maximum of £4,000 per year.

What about the Help to Buy ISA?

Those who currently have a Help to Buy ISA can continue to put money into it. You can transfer it to a Lifetime ISA, or you can choose to put money into both – but you will only be able to use the bonus from one of them to buy your first property.

For both the Lifetime ISA and Help to Buy ISA, the home you buy with the proceeds must be in the UK, must be your first property, and can’t be a buy-to-let property.

What are the inheritance rules for a Lifetime ISA?

The inheritance rules for the Lifetime ISA are the same as all other types of ISA. If your spouse was to pass away, subject to succession rules and your spouse’s will, you can transfer your spouse’s Lifetime ISA to your own Lifetime ISA or ISA, tax free (and vice versa for your spouse if you were to pass away, of course). This will not reduce your personal ISA allowance. Unlike a pension, it forms part of your estate for tax purposes.

See what you could get

Use our Lifetime ISA calculator to see how much you could put aside with a stocks and shares Lifetime ISA.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest.

A Lifetime ISA may not be right for everyone:

  • You must be 18–39 years old to open one.
  • If you need to withdraw the money before you’re 60, and it’s not for the purchase of a first home up to £450,000, or a terminal illness, you’ll pay a 25% government penalty (the withdrawal penalty will be temporarily reduced from 25% to 20% from 6 March 2020 till 5 April 2021 due to coronavirus). So you may get back less than you put in.
  • Compared to a pension, the Lifetime ISA is treated differently for tax purposes. You may be better off contributing to a pension.
  • If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions.

A Lifetime ISA may not be right for everyone and tax rules may change in the future. If you are unsure if a Lifetime ISA is the right choice for you, please seek independent financial advice.