Overview
Lifetime ISA’s or LISA as they are also known (I will use both terms in the rest of this post), are tax-free savings accounts, part of the ISA product family. They can be opened by UK residents between the ages of 18 and 39. You can invest up to £ 4,000 a year in your LISA, which will use up part of your yearly ISA allowance of £ 20,000.
Example:
Investor subscribes £ 4,000 into their LISA account, £ 10,000 into their stocks and shares ISA and £ 6,000 into their cash ISA. Please note the one ISA per type per year rule.
The major benefit of a LISA account is that you receive a government bonus of 25% on your subscriptions. Hence, if you subscribe the full Lifetime ISA allowance of £ 4,000 in a tax year, then you will receive a bonus of £ 1,000. This bonus will be paid directly into your LISA account, usually within a month of your subscription. Those funds are then free to be invested, in the case of a stocks and shares ISA. In the case of a cash ISA, those funds will then earn interest.
The downside is that you will pay a withdrawal charge of 25% on unauthorised withdrawals. This charge will be withheld by your LISA provider and paid back to HMRC.
You will not pay this withdrawal charge, if you are making an authorised withdrawal. In order to qualify for an authorised withdrawal, you will need to evidence a Life event.
Life Events
Buying your first home
If you have not previously purposed a house, then you will qualify to make an authorised withdrawal from your LISA account without suffering the withdrawal charge. This applies even if you are buying your first with someone whom is not a first time house buyer. The rules are somewhat complicated, for further information refer to this link.
12 months to live
HMRC define a more depressing life event as the Lifetime ISA investor having been diagnosed with 12 months to live. In this case the investor could provide their LISA provider with evidence from a qualified medical practitioner and then make withdrawals without being subject to the 25% withdrawal charge.
Turning 60
This is not a life event as such, but once the investor has turned 60, withdrawals are automatically free from the withdrawal charge.