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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

How to benefit from the new savings wrapper and when to use it
Thursday 02 Mar 2017 Author: Daniel Coatsworth

Investors can receive up to £33,050 of free money from the Government by using the new Lifetime ISA. We’ve spotted three neat ways to get a head start with grabbing this bonus cash if you are less than 40 years old on 6 April 2017.

Even if you are 40 or older on this date, you shouldn’t make the mistake of thinking the Lifetime ISA is irrelevant to you. We’ve identified a good way in which you can help family and friends access the Government bonus cash. In doing so, you can help them build a decent savings and investment pot via this new type of ISA.

You may question why we’ve written £33,050 when the Government says you can only earn up to £32,000. That’s because we’ve spotted a loophole where you can earn an extra £1,050. Keep reading to discover how to do it.

What you will learn from this article

In this article we explain how the new Lifetime ISA works; how to get the most from it; and we discuss how it compares to a pension.

Furthermore, we explain the decisions you need to make when deciding if the Lifetime ISA is appropriate for you.

Lifetime ISA in 20 seconds

1. Available to anyone under 40 years as of 6 April 2017

2. Pay in up to £4,000 a year and receive 25% cash bonus from the Government

3. Bonus paid until you reach age 50

4. Penalty-free and tax-free withdrawals if using money to buy first home or you have critical illness

5. For all other circumstances, money locked away until age 60 unless you pay 25% penalty on total investment pot

Three top picks

Our top tactics involve transferring existing positions from Cash ISAs, Stocks & Shares ISAs or Help To Buy ISAs.

We also advise anyone under 40 who is not ready or able to start using a Lifetime ISA to put £1 in an account to guarantee qualification for the Government bonus cash until you are 50 years old. We will explain these strategies in full later on.

How does the lifetime ISA work?

The Lifetime ISA is quite easy to understand. Adults under the age of 40 (as of 6 April 2017) can open an account and pay in up to £4,000 in each tax year. The Government pays 25% bonus (i.e. up to £1,000) on these contributions annually. The bonus is paid up to the age of 50.

You can withdraw money without penalty to buy your first home worth up to £450,000 or if you are terminally ill. Otherwise the money is locked in the account until you reach age 60. Withdrawals at this stage will be tax-free.

Anyone who wants to ‘unlock’ the money before this age (excluding first property purchase or critical illness) will be subject to a nasty 25% penalty charge which includes any money you’ve made thanks to investment growth. More on this later.

Where can I get a lifetime ISA?

Share dealing and self-invested personal pension (SIPP) provider AJ Bell Youinvest is likely to be one of the first providers to launch a Lifetime ISA, potentially in late April or May.

The Financial Conduct Authority only finalised the full rules and regulations for the savings and investments wrapper in early March, hence why you are unlikely to see many financial services providers have Lifetime ISAs ready for the 6 April official launch date.

Longer-term we wouldn’t be surprised to see the Government take a more flexible approach to the circumstances in which you can access cash earlier than age 60. This might involve borrowing money from the ISA without any charges to fund a wedding, for example, as long as the funds are paid back.

Who is best suited to using a lifetime ISA?

The free cash from the Government makes Lifetime ISAs very attractive – but they aren’t right for everyone.

They are great if you want to buy your first house or save for retirement. They aren’t necessarily the best wrapper for your savings and investments if you want to access the money for other reasons before the age of 60 due to exit penalties.

Neither is the Lifetime ISA automatically a more attractive substitute for pensions; it depends on your personal circumstances.

Anyone in full time employment should benefit from additional pension contributions from their employer which you wouldn’t get with a Lifetime ISA. Both wrappers have Government bonus payments, albeit presented in different forms. One is tagged as a ‘bonus’, the other is ‘tax relief’ – essentially they are the same.

To help you better understand when to use the Lifetime ISA, we will now run through a range of different real life scenarios. If you’ve already bought your first home, skip past the first section until you see ‘Scenario 2’ where we discuss other reasons to use – or not use – a Lifetime ISA from that point onwards in the article.



You can save money into a Lifetime ISA and withdraw funds (including any Government bonus) to buy your first home at any time from 12 months after opening the account.


You won’t get any Government bonus until the money has been in the new account for at least 12 months.

The money from your Lifetime ISA to help fund a first home is paid directly to the conveyancer/solicitor, not you.


Anyone who has already invested money into a Help to Buy ISA has the chance to earn a bumper bonus after the first year of using a Lifetime ISA. Here’s how to do it.

The Help to Buy ISA launched on 1 December 2015. You are allowed to invest up to £1,200 in the first month, then a maximum of £200 a month thereafter.

The maximum investment would therefore be £4,200 by the end of March 2017 (i.e. a week before the Lifetime ISA launches).

Transfers from Help to Buy ISA to the Lifetime ISA don’t contribute towards the £4,000 yearly allowance, yet they do qualify for the bonus.

So you could transfer £4,200 from a Help to Buy ISA and save a further £4,000 into the Lifetime ISA in the first year for a total of £8,200. The Government will pay a bonus on the full amount, worth £2,050.

There is a catch. The Help to Buy ISA comes with a 25% bonus anyway, but you only get the money on exchange of contracts on your first home. By transferring to a Lifetime ISA you get the bonus after the first year so the Government’s free cash can benefit from any investment growth.

Should you save in cash or invest in the stock market?

Help to Buy ISAs are only allowed to hold cash whereas you can also hold shares and investment funds in a Lifetime ISA.

This brings us to a very important point. Where should you invest if you are saving up for a house: in cash or the stock market? It all depends on when you plan to buy the house.

As a rough guide, we believe you should stay in cash if you want to buy within three years. That period is unlikely to give you enough time to recover from any large dip in the stock market.

Opt for lower-risk, global diversified investment funds if you want to buy within three and five years.

Anyone with more than five years before they want to buy a house should consider a broader portfolio of equities, funds and bonds, albeit not high risk investments.

How much could your earn?

The average deposit for first time buyers in 2016 was £32,321 according to Halifax. Therefore someone who saves the maximum £4,000 each year into a Lifetime ISA and receives the Government’s bonus of £1,000 each year could end up with enough money in roughly six to seven years.

You would make £35,646 in six years if your investment portfolio grew at 5% a year. For those putting the money into cash, your savings would be worth £36,418 after seven years of investing the full amount and achieving 1% interest.

Anyone saving half the maximum amount in a Lifetime ISA (£2,000 from you; £500 from the Government) would take 10 years to reach the average deposit via the stock market at 5% annual return; and 13 years via cash at 1% annual interest.

House Deposit Goal:  Invest in stock market or stick to cash?

Depends when you want to buy. We’d suggest:

• Less than three years: stick to cash

• Three to five years: low-risk investments

• Five+ years: A diversified investment portfolio 



Earlier in the article we said one of our ‘top tricks’ for making the most of the Lifetime ISA was to transfer existing money from a Cash ISA or Stocks & Shares ISA. That also applies if you want to use a Lifetime ISA as a retirementsavings vehicle.

You need to be certain that you don’t want to access the money before 60 without a penalty. You would be transferring money from a vehicle that has instant access to one with restricted access.

You should also consider any fees from transferring your portfolio as some providers will impose a charge for ISA transfers.


Once you’ve worked out your capacity for funding the Lifetime ISA purely as a retirement vehicle, the next step is to establish your time horizon for investing and risk appetite.

Theoretically, the longer time you can spend invested in the market, the higher the risk you can afford to take. However, not everyone has the appetite to put their money into less predictable areas like emerging markets, biotech stocks or commodities. This decision is purely up to you.

We will be running a series of articles in March and April that discuss fund and stock suggestions for different risk appetites and time horizons.

Make sure you keep reading Shares every week as these articles will provide a wealth of ideas for you to research further and potentially consider as additions to your portfolio.

Should you stop paying into your pension and use a lifetime ISA instead?

Many people will look at the bonus associated with the Lifetime ISA and assume it is more generous than a pension. It isn’t.

Basic rate taxpayers can put £4,000 into a pension and the Government will top it up with 20% tax relief to £5,000. The same £4,000 into a Lifetime ISA also becomes £5,000 thanks to the 25% Government bonus.

The 20% and 25% figures are a bit confusing; they ultimately lead to the same total figure.

The former calculation is 20% based on the total amount including the Government’s contribution. The latter is based on the amount you contribute

A higher rate tax payer gets 40% tax relief on pensions. They put in £4,000 and the Government tops it up by £1,000 so your total inflow is £5,000. An extra £1,000 is then taken off your tax bill. That certainly beats a Lifetime Isa.

If you are a higher rate taxpayer, you will be better off with a pension until you breach the annual (£40,000 a year) and lifetime (£1m) allowances, when you become liable for nasty tax charges. At this this stage, the Lifetime ISA is a very good alternative option if you want to save further money and benefit from Government incentives.

One area to consider when weighing up the Lifetime ISA versus pensions decision is the fact that saving in the former vehicle can impact your benefit entitlement. Another factor to consider is that you can take money from your pension aged 55; you need to be 60 to start cashing in Lifetime ISA money without penalty.

Furthermore, anyone contributing to a workplace pension is likely to get additional contributions by their employer. Indeed, under auto-enrolment all employers will eventually be required by law to match your first 3% of contributions and many will offer an even better deal. Therefore that’s even more ‘free’ money going into your retirement savings pot.

Don't sacrifice longer term savings just to buy a house

• Opting out of a workplace pension to focus on saving for a house deposit via a Lifetime ISA could be a dangerous move

• You may also lose out on valuable employer contributions and Government tax relief – ie. TWO SETS OF FREE MONEY – to your pension

• You'd lose the benefits of time in the market for retirement saving.

• You may also lose out on valuable employer contributions and Government tax relief – ie. TWO SETS OF FREE MONEY – to your pension.



This is a tricky situation. Our first reaction would be: ‘don’t tie up your money’ as once it is in a Lifetime ISA, it is there until you turn 60 if you want to avoid penalties (and don’t want to buy your first house).

The exit charges can be really painful once you look at a few illustrations. For example, investing £4,000 a year (and receiving £1,000 a year from the Government as a cash bonus) would see your portfolio grow to £28,949 after five years assuming 5% annual gain on your investment, according to calculations by AJ Bell.

If you withdrew that money from your Lifetime ISA before 60 and didn’t use the money to buy your first home, you’d only be left with £21,712 after paying the 25% Government penalty. That’s a reduction of £7,237 – significantly more than the £5,000 that the Government would have put in your pot as annual bonuses.

A normal Stocks & Shares ISA will give you the freedom to move money in and out whenever you like, subject to you having liquid investments. A Lifetime ISA will give you free money, assuming you also contribute, but those funds are locked away.

If you can, open both a Lifetime ISA and a Stocks & Shares ISA. Contributing to both wrappers would allow you to have a pot of money that is easily accessible and a pot that would also benefit from the Government bonus.

Just remember that you can only invest a maximum £20,000 a year across all types of ISAs.



Anyone over the age of 40 and not eligible for the Lifetime ISA shouldn’t ignore the savings and investment wrapper. It could be the ticket to helping people develop a healthy habit of saving money from a young age.

A great birthday or Christmas present for someone in your family or a friend might be money that you insist they put into a Lifetime ISA.

Your child might already have a Junior ISA and money from that wrapper could be transferred into a Lifetime ISA once they turn 18.

Many parents are worried their children will spend any money inside a Junior ISA once they become an adult and have control over the funds. Instead, the 25% Government bonus from the Lifetime ISA could be the necessary incentive to encourage them to keep the money invested in the stock market or held in cash.

Are you too old for Lifetime ISA? Why not help others

Are you too old for Lifetime ISA? Why not help others

You can gift up to £3,000 a year without inheritance tax liabilities

Putting cash into your child’s Lifetime ISA (if they are over 18) could encourage them to develop their own long-term savings habit

Everyone in the UK has a £3,000 ‘gifting allowance’ per year, being the maximum someone can give to another individual without the recipient having to pay inheritance tax.

That means you could theoretically give your child up to three quarters of the money they are allowed to put into a Lifetime ISA each year without any tax liabilities. They’d then benefit from the Government bonus on this gift, if held in a Lifetime ISA.

You can give more than £3,000 a year to your family and they wouldn’t have to pay inheritance tax as long as you lived for at least seven years after gifting this money.

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