What are the limits of the lifetime ISA?

Are you thinking about opening a lifetime ISA? Get to know its limits first.

Authored on
06 Jul 2023
|
Category
Getting started
|
Read time
  3 minute read

While it can be a great way to boost your savings for your first home or retirement, it may not be the right choice for everyone. Let’s take a closer look. 👀

So, what is a lifetime ISA (or LISA for short)?

Well, it's a special savings account that offers some pretty neat advantages, especially for first-time homebuyers. Not only does it give you a government bonus of 25% on your payments (up to £1,000 per year), but also, any gains you make when investing will be tax-free, giving your savings the chance to grow faster, and who doesn't love that? 🤩 

Is the lifetime ISA definitely for me?

I’m glad you asked. To help you answer that question, let’s cover some of the potential drawbacks. 👇

Who can open a lifetime ISA? 

When it comes to opening a lifetime ISA (LISA), there are a few limits to keep things in check. Firstly, although age is just a number, for a LISA, you need to be 18 or over and under 40 to start using it to save. You also must be a resident of the UK or a crown employee working abroad.  

Payment Limits 

Although it may seem quite a lot, it’s important to bear in mind that you can save up to a total of £20,000 a year across all types of ISAs and that includes the lifetime ISA. Specifically for the LISA, the maximum annual contribution is £4,000. So, while we encourage you to make the most of your LISA, let's remember to stay on HMRC's good side. Let's keep it legal, folks, and follow those contribution limits. 

Withdrawals

It’s worth noting that there are only three legitimate reasons to dip into your LISA savings. Firstly, for buying a first home up to a value of £450,000, secondly for retirement from the age of 60, and finally in case of a terminal illness. If you do so outside of these times, you'll face a government withdrawal charge of 25% applied to the withdrawn amount. Ouch!  

So, if you were to take out £12,500 (£10,000 plus the 25% government bonus of £2,500), the 25% withdrawal charge would be on the full amount, leaving you with £9,375.00. Therefore, it's important to think twice before raiding your LISA piggy bank. 🐖 

Multiple ISAs 

You can open multiple lifetime ISAs over your lifetime, but here's the catch: you can only open and pay into one LISA per tax year. So, choose your LISA wisely, because the government bonus is applied to only one account. It's like having an annual VIP pass for just one LISA party. 🥳 

First-time buyer considerations 🏠 

If you're a first-time buyer, there are some things to get your head around. The lifetime ISA can only be used towards a first home purchase provided the property price is below £450,000, and the property must be bought at least 12 months after you make your first payment into the LISA.  

You’re also required to use a conveyancer or a solicitor to act for you in the purchase but your ISA provider will pay their costs directly to them. 

It's also not possible to use the LISA for buy-to-let properties or when buying a property without a mortgage. So, if you're dreaming of becoming a property tycoon, you might need to explore other options. 

Retirement considerations 🍹 

For those considering the LISA for retirement savings, there's an important requirement to keep in mind. If you want to access your LISA funds charge-free, you'll have to wait until you reach the ripe age of 60.  

Patience is a virtue, but here's the kicker: when you reach 50, you won’t be able to pay any more into your LISA and the government bonus no longer applies. However, your savings will still earn their investment returns as normal.  

A lifetime ISA should not be used instead of a pension, but to supplement it. Using only a LISA could not only cause you to miss out on employer contributions to your pension but could also potentially affect your entitlement to certain means-tested benefits down the line. 

So, keep all that in mind as you plan for your golden years.  

To wrap up...  

These are just some considerations to bear in mind. The lifetime ISA can be a super useful tool that anyone saving for first home or supplementing their retirement savings can benefit from. 

What’s more, Dodl offers one of the lowest-cost investment LISAs going, with a simple annual account charge of just 0.15% (minimum £1 per month). Plus, we keep things simple and jargon-free, because managing your finances needn’t be scary… or boring! Just remember, investing carries risk.  

It's important to carefully consider your personal circumstances before opening a lifetime ISA. We've covered the potential drawbacks and limitations, but it's up to you to weigh up the benefits and make an informed decision. ⚖️ 

If you do find this to be a match made in investing heaven for you, read more about our award-winning lifetime ISA. If you’re ever unsure, consulting with a financial advisor is always a smart move when it comes to your savings and investment strategies. 

Ready to start investing for your future? 

 

Open a Dodl lifetime ISA today

 

🔔  Just remember, LISA and tax rules apply, and as always, the value of your investments can go down as well as up.   


It's important to know

You have to be solely a UK citizen and resident to open an account with Dodl. If you're not solely a UK citizen but still want to invest, you may be able to open an account with our parent platform AJ Bell. 

The past performance of investments isn't an indicator of their future performance and their value can go down as well as up. This means you could get back less than you originally invested. 

Dodl doesn’t offer any advice so if you’re not sure about the risks involved with investing, you should speak to a suitable financial adviser. 

How you're taxed depends on your circumstances, and tax rules can change in future.