Financial Matters

With Akwasi Duodu | akwasi@sterlingandlaw.com | www.sterlingandlaw.com

Lifetime ISA – the forgotten gem

Often forgotten in financial planning, the Lifetime ISA can be an extremely useful investment instrument. Introduced in 2017, it was a replacement to the Help to Buy ISA, which many have used to assist them purchasing their first home. It is also an extremely useful tool in building an additional pot of money to fund retirement.

How does it work?

In short, you could save up to £4,000 each tax year and in return the government would give you a 25% bonus. This means a £4,000 contribution would be worth £5,000 at the end of the tax year. Essentially free money! But there are some caveats… • You must be under 40 to have one • The fund must be used as a deposit on your first home, valued up to £450,000 – Buy to Let (BTL) does not qualify • Or as a retirement fund If you want to withdraw money from your Lifetime ISA for any reason other than the above, there could be penalties.

Using a Lifetime ISA to purchase your first property

If you are on the hunt for a property and are a firsttime buyer under 40, then considering a Lifetime ISA could make a big difference to your deposit amount. You’ll need to have held a Lifetime ISA for 12 months before using it. Let’s assume that you’re purchasing your first home with a partner, who has also never purchased a property. You contribute £4,000 now and they do too. You’ll have both contributed £4,000 each, a total of £8,000. With the government’s bonus’ you’d now have £10,000 to go towards a deposit. Do this again the following tax year and you’d have £20,000 saved, with £4,000 of that being free money from the government.

When you should open a Lifetime ISA

but many people miss out and leave it too late. Once it is open though, you could contribute up to age 50. The majority use it to purchase a property, so often don’t realise how valuable it could be for retirement planning.

The benefits of using the Lifetime ISA in retirement

The Lifetime ISA can also be beneficial in retirement planning. If you contributed £4,000 to a Lifetime ISA, you’d receive £1,000 tax free from the government and when you withdrew it after age 60, you wouldn’t pay a penny in tax. That’s a guaranteed 25% return! If you invested the money, the effect of compounding over 20 years could mean that £1,000 bonus was even more valuable.

Frequently Asked Questions

• Does this form part of my ISA allowance? Yes; if you contributed £4,000 into your Lifetime ISA, you could only contribute a further £16,000 into a Cash or Stocks & Shares ISA in that tax year. • Does the bonus use some of my ISA allowance up? No, it does not. • Should I invest my Lifetime ISA in stocks and shares? If you are not buying a property, you won’t be able to access the Lifetime ISA without penalty until age 60. This means long term. So, investing with a long-term approach would make sense.