Those using the new Lifetime ISA to save for their first home or retirement need to make sure they aren’t caught out by complicated small print that could lead to delays, admin headaches and potentially their home purchase being stalled.

The Lifetime ISA was launched last year, and allows those aged 18 to 39 to open an account, where they can save up to £4,000 a year. The Government will top up any contributions by 25%, up to a maximum of £1,000 each year.

Thousands of first-time buyers have rushed to open the account, and use the valuable Government boost to top-up their deposit savings.

However, AJ Bell has identified seven small print quirks with the Lifetime ISA that account holders need to be aware of.

YOU NEED TO PUT MONEY IN YOUR LIFETIME ISA BEFORE YOUR 40TH BIRTHDAY, OR YOU MISS OUT

Lifetime ISAs can be opened by anyone over the age of 18 before their 40th birthday. However, just opening an account is not enough. HMRC does not deem the account to be officially opened until money is put in – even if that’s only £1.

This means that anyone rushing to open the account before their 40th birthday needs to leave enough time to open the account and make their first deposit, bearing in mind bank transfers can also take a number of days to complete. If money isn’t deposited in time, then HMRC states the account must be closed.

YOU NEED TO DEPOSIT MONEY IN THE SAME TAX YEAR YOU OPENED THE LIFETIME ISA 

In a similar vein to the previous quirk, you need to make sure you have deposited money into the account in the same tax year you opened it.

For example, someone who opened an account in March 2018 had to make a payment before 5 April this year for it to be officially opened. If not, HMRC rules state the account has to be closed by the provider and you will have to reapply.

This rule is not the case with other ISA or SIPP accounts and so investors could understandably assume this was not the case. It seems unfair to create a product that doesn’t act as people would naturally expect it to do, because of the limitations of HMRC computer systems.

YOU CAN’T CLAIM THE BONUS IF YOUR DETAILS DON’T MATCH HMRC’S

The Government pays a 25% bonus on all contributions to a Lifetime ISA, up to £4,000 a year. When your Lifetime ISA provider claims your 25% Government bonus, it submits all the details it has on you and HMRC checks that this tallies with the information it holds on you before it will pay out the bonus. If there are any discrepancies in this information, HMRC will not pay up.

The most likely instance is where someone has changed their name, particularly after marriage, and has not updated this with HMRC, or where they have made an error on their forms.

It may seem like a small issue, but it’s affected hundreds of cases AJ Bell has seen, where there has been a mismatch in details, meaning the bonus couldn’t be paid as quickly as it should.

YOU HAVE TO OPEN AND FUND THE ACCOUNT 12 MONTHS BEFORE YOU BUY A PROPERTY

If you plan to buy a property in the next 12 months, the Lifetime ISA is not the product for you. The Lifetime ISA rules dictate that you must have the account open for 12 months before you can use it for a property purchase. And remember, that’s 12 months from the first payment in, not just opening  the account.

The 12-month rule is intended to stop people paying money in, immediately claiming the lucrative Government bonus and then withdrawing the money, but 12 months feels like a very long time. Six months, or even three months could be more reasonable.

YOU CAN’T PAY INTO A CASH LIFETIME ISA AND A STOCKS AND SHARES LIFETIME ISA IN THE SAME TAX YEAR

Unlike conventional ISAs, where you can open and pay into one cash ISA and one stocks and shares ISA in each tax year, you can only open one Lifetime ISA each year. If you have opened two Lifetime ISAs, the second one to be opened will be closed and the money returned, regardless of how much is in there.

You could have paid £10 into the first Lifetime ISA and £3,990 into the second, but the second one will still be closed.

This is a particularly important to remember if you are transferring from one Lifetime ISA you’ve opened earlier in that tax year to another – this is possible, but the first payment into the new Lifetime ISA must be the full transfer from the original Lifetime ISA.

IF YOU TRANSFER MONEY FROM AN ISA IT COUNTS TOWARDS YOUR £4,000 LIMIT

You can contribute up to £4,000 into a Lifetime ISA each year. If you transfer money in from another ISA, it will count towards this limit.

There was an exception to this rule for the first year of Lifetime ISAs, where you could transfer your entire Help to Buy ISA, regardless of the value, and it didn’t count towards your £4,000 annual limit. However, this has now ended.

The only exception is where you are transferring from one Lifetime ISA to another Lifetime ISA (see quirk #5).

YOU COULD WAIT UP TO EIGHT WEEKS FOR YOUR BONUS MONEY

For the first year the 25% Government bonus on the Lifetime ISA was paid after the end of the year, but now it is paid monthly. However,    HMRC only allows your   Lifetime ISA provider to apply for the bonus money once a month. It can take up to 14 days to pay the bonus from this date.

For HMRC’s purposes, each month runs from 6th of the month to the 5th of the following month. Your provider can then apply for the bonus from the 19th of that month, and get the bonus paid up to 14 days from this point (although in reality, so far, it has been paid sooner).

Someone who paid the money in on the 6 June, for example, will not see the bonus for at least six weeks, and it could be as much as eight weeks.

This is only a problem for those who are at the stage of buying a house, and had banked on the latest month’s bonus money to go towards their house purchase.

Laura Suter, personal finance analyst, AJ Bell

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