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Why the LISA could be the perfect solution to help you save towards your first home

We look at four reasons why a Lifetime ISA could be a good option to save towards your first home.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The Lifetime ISA (LISA) is a savings account which was set up to let you save towards your first home or for retirement. You have to be over 18, but under the age of 40 to open one. You can add up to £4,000 each tax year until you turn 50, and the government will top up your contributions by 25%.

With applications for a Help to Buy ISA no longer permitted, we think the LISA is one of the best ways to kick-start saving towards your first home. This article explains why.

Remember this article isn’t personal advice. If you need help on deciding the right course of action for you, please speak to an adviser. Tax rules can change and benefits depend on individual circumstances.

Bonus from the government

It’s not often the government gives away tax-free cash, but with a LISA the government will add an extra 25% on top of what you save. That’s up to an extra £1,000 per year.

You can make contributions to your LISA and receive the bonus from age 18 up to the age of 50. So if you’re fortunate enough to be able to contribute the maximum amount every year, you could receive up to £33,000 extra from the government.

Your bonus is paid upfront – so more potential for growth

Unlike the Help to Buy ISA (now closed to new applicants), the LISA government bonus is paid into your account before you make an eligible property purchase, or use it later on for retirement – this is usually 4-9 weeks after you’ve added money into your LISA.

This means that you have the potential to not only grow what you put in, but what the government puts in too. And just like the Help to Buy ISA, any growth in the LISA would be free from any UK income or capital gains tax.

More choice

After 12 months from the first payment you can use the money towards your first home worth up to £450,000 – wherever you live in the country.

You can also choose whether to save as cash or invest, whereas the Help to Buy ISA only allows you to save as cash.

Investing in the stock market gives you the chance to make more money than cash alone. But remember it also carries additional risks, as unlike the security of cash the value of investments can fall as well as rise so you could get back less than you invest.

If you choose to invest with your LISA, you should consider saving for at least 5 years.

Flexibility

After a first lump sum payment of £1,200, into the Help to Buy ISA, it’s capped at up to £200 a month.

However, with the LISA, you can choose to save monthly or in lump sums as long as you keep within the £4,000 annual limit, you can save as little or as often as you like.

If you decide not to use the LISA towards your first home, you could keep the money within the LISA to put towards your retirement and still keep your government bonus.

Things to be aware of

If you decide that you no longer want to use your LISA towards your first home and you’d like to take the money out before age 60, then remember you could be subject to a 25% early withdrawal charge. And if you’ve made any gains on your investments or received any interest on your cash, you’ll be charged 25% of them, too.

This charge is on the whole value that you withdraw, not just the government bonus, so you might end up taking out less than you put in.

Remember, the LISA must have been open for 12 months after the first payment before it can be used towards buying your first home without the early withdrawal charge being applied.

Find out more about LISAs

Tax year ends 5 April

The deadline for this tax year is fast approaching, so if you’d like to make the most of the government bonus available, there’s still time.

You can’t roll over any of the allowance to next year, so if you’re thinking about opening or topping up a LISA anyway, doing it now could pay off.

How to open or top up a LISA

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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