Everything you need to know about the Lifetime ISA for the new tax year

In the recent Budget announcement, the Chancellor confirmed that the Lifetime ISA (LISA) withdrawal penalty charge would revert back to 25% from 6 April.

Due to the pandemic, the penalty was temporarily reduced to 20% in order to support people who needed to access their funds during difficult times. This meant that the penalty charge only impacted the government bonus, as opposed to the original investment.

The original Lifetime ISA terms continue to offer fantastic benefits, but there are a number of factors to consider when deciding whether to open one.

We’ve answered some of the most important questions you might have about the LISA and whether it’s the right account for you.

I’m thinking of opening a LISA – is this the right option for me?

It depends. There is no doubt that the government bonus makes the Lifetime ISA an appealing option, but there are a range of factors to think about when deciding if this is the best account for you. We’ve summarised some of the key points to consider:

• Your age - you need to be aged between 18 and 39 to open a Lifetime ISA – although you can transfer your existing one to another provider. You can earn the government bonus on your savings until you reach the age of 50.  
• What you are saving towards - the LISA is suitable for saving for a first home deposit, or towards retirement. Withdrawals for any other reason are subject to a heavy penalty which removes the bonus element and more.  
• Whether you have an emergency fund – because of the penalty, LISAs are best suited to savers who are less likely to need to make an emergency withdrawal. It’s a good idea to ensure you have an ‘emergency fund’ set up so you don’t need to withdraw from your LISA if you fall on hard times.  
• How much you can afford to save – there is a limit of £4,000 per tax year on LISA savings. If you are looking to save more than this, a LISA is still a valuable option but you will need to look at viable alternatives for your additional savings.

What does the penalty charge reversal mean for me?

If you hold a Lifetime ISA, the 25% penalty charge means that your capital will be at risk if you make a withdrawal for an unauthorised reason.

While 20% of the penalty fee accounts for the government bonus, the remaining difference will come out of your capital.

For example, if you put £4,000 in a LISA, you will have received the full £1,000 maximum government bonus, making your total balance £5,000. If you need to make an ‘unauthorised withdrawal’, you will be charged a total of £1,250 – which means you will lose £250 from your capital and the £1,000 bonus.

This works out at a penalty charge of 6.25% on your original investment.

How does the bonus get deposited into my account? 

Paragon will claim the bonus on your behalf each time you make a deposit. This will be added onto your balance 4-9 weeks after your deposit.

The bonus will be claimed up to the total yearly allowance each time you make a deposit, until you reach the age of 50.

Are there any conditions around the type of home you can buy using a LISA? 

Yes – there are some conditions and it’s important to consider the type of property you might want to buy before opening a Lifetime ISA.  

There is a number of criteria you need to meet:

• You must be a UK resident, unless you or your spouse/civil partner is serving overseas for the UK Crown 
• You can’t have previously owned a property in the UK or aboard 
• The property you buy has to be in the UK and cost less than £450,000 
• The property will be your main residence immediately on completion 
•  The property is purchased through a residential mortgage unless you or your spouse/civil partner is serving overseas for the UK Crown and you plan for the property to be your main residence when you return  
• You must buy the property through a solicitor or conveyancer  
• You can’t act as your own conveyancer  
• You must have made your first deposit into a Lifetime ISA at least 12 months before instructing your conveyancer

At which point in the house purchase can I access the money? 

We can’t send your LISA funds directly to you for a house purchase, they have to be sent to a Conveyancer or Solicitor. To start the process, you will need to complete an Investor Declaration form and pass it to your conveyancer. They will then need to fill in a Conveyancer Declaration and send both to us to release your funds.  

I’m buying a property with my partner, who isn’t a first time buyer. Can I still use my LISA?  

Yes. If you are a first time buyer then you can use funds from your LISA towards a deposit on a property, even if you’re buying a house with someone who isn’t a first time buyer.  

How do I withdraw the money to use for retirement?  

After your 60th birthday you will have access to all the money in your Lifetime ISA.  

Any money you choose to keep in your LISA after 60 will keep earning tax-free interest. If you don’t want to retire until after 60, this won’t affect your Lifetime ISA. It simply means you’ll have access to the money from aged 60. To withdraw your savings once you have turned 60, simply login to your account and follow the onscreen instructions. The funds will then be paid into your nominated bank account. 

I want to transfer my LISA from another provider – how do I do this?

It’s easy to transfer your existing LISA from another provider. Just head over to our Cash Lifetime ISA page and choose to transfer a LISA.  

You’ll firstly complete an online application form which will start opening your Paragon LISA. You’ll then need to complete and send us a LISA transfer form. We will contact your provider and arrange the transfer and then write to you to confirm when it’s complete.  

You also don’t need to worry about your bonus when transferring your LISA to us. Any government bonus received by your original provider after the transfer will be sent to Paragon. We will claim your government bonus and apply it to your LISA with us going forward.