Is a Lifetime ISA a Cash ISA?
A Lifetime ISA can be a great way to save for your first home and retirement all under one roof. But is a Lifetime ISA the same as a Cash ISA and what should you think about before opening one? Find out everything you need to know in this article.
When considering opening a LISA, remember that withdrawals for any purpose other than buying a first home or for retirement will incur a 25% government penalty, meaning you may get back less than you paid in. Tax treatment depends on individual circumstances and may be subject to change in the future.
Is an ISA classed as savings?
Yes, an ISA is classed as savings, no matter what type of ISA you have - ISA stands for individual savings accounts. Unlike a normal savings account, you can save up to £20,000 each year in an ISA without having to pay tax on your savings interest. There are different types of ISAs, including Cash ISAs, Stocks and Shares ISAs and Lifetime ISAs.
If you receive means-tested benefits or you may need to in future, saving in an ISA could affect your eligibility. If you save less than £6,000 across your ISAs and other savings/investments accounts, you should still be eligible for means-tested benefits. If you save more than £6,000 in savings and investments, you may be eligible for a reduced rate of benefits.
If you save more than £16,000, you’re unlikely to be eligible for any means-tested benefits. You’ll need to use up your savings (even if that means having to sell your investments in a Stocks and Shares ISA) before the Department for Work and Pensions (DWP) will consider your benefits claim.
Remember that while some bank accounts, savings accounts and ISAs will let you access your money penalty-free, it’s not quite as simple with your Lifetime ISA savings. If you withdraw money from your LISA for anything other than your first home or retirement, you’ll pay a 25% penalty on the amount you withdraw. Not only will this leave you without the 25% LISA bonus, but you’ll also lose 6.25% of your own money too!
Learn more: Cash Lifetime Lifetime ISA vs Stocks and Shares Lifetime ISA
Tax treatment depends on individual circumstances and may be subject to change in the future
Is a Lifetime ISA the same as Cash ISA?
A Lifetime ISA isn’t the same as a Cash ISA, but they do share some similarities. Both Cash ISAs and Lifetime ISAs are individual savings accounts (ISAs) where you can save for the future tax-free. You can save up to £20,000 a year in a Cash ISA and use the money for whatever you like. Whereas Lifetime ISAs have a lower limit of £4,000 a year and you can only use the money to buy your first home or fund retirement. What really sets Lifetime ISAs apart from Cash ISAs is that your savings will benefit from a 25% bonus from the government on your contributions, up to £1,000 each tax year.
So if over three years you put in the maximum £4,000 into a Lifetime ISA, you’ll get a free £3,000 off the government. Plus, you’ll earn interest growth if you use a Cash Lifetime ISA, or potential investment growth if you go for a Stocks & Shares Lifetime ISA.
And, if you’re buying a home with another first-time buyer, you can open a Lifetime ISA each and combine your savings and bonuses for an even bigger deposit.
Capital at risk. Past performance is not a reliable indicator of future results
For some first-time buyers and retirement savers, Lifetime ISAs are a no-brainer. For others, it can make more sense to save in a Cash ISA instead.
What are the pitfalls of the Lifetime ISA?
You need to have your Lifetime ISA for 12 months or more before you can use it to buy your first home, otherwise you’ll be hit by the 25% withdrawal penalty, meaning you may get back less than you put in. You’ll also be subject to the withdrawal charge if you use the funds for an ineligible property, for example purchasing a home worth over £450,000, or you use them for something other than buying your first home or funding retirement. If it’s hard to find a home in your area under this price, you may be better suited to a traditional savings account or Cash ISA. The same goes if you want to save for short-term goals and day-to-day spending.
Learn more: Lifetime ISA withdrawal penalty. How does it work?
Is a Lifetime ISA worth having?
Yes, a Lifetime ISA could be worth having, especially if you’re a first-time buyer and you’re happy to wait at least 12 months to buy a home worth less than £450,000. A Lifetime ISA is the only place where you can boost your house deposit by 25% for free. And if you open a Tembo Cash Lifetime ISA, you’ll reach your savings goals even faster with the help of a market-leading interest rate of 4.75% AER (variable). A Lifetime ISA can be a great way to save for retirement too, particularly if you’re self-employed or a stay-at-home parent. If you’re employed or you’re a higher or additional-rate taxpayer, you’ll usually be better suited to a pension.
Read more: Is an ISA better than a pension?
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