The ISA deadline is fast approaching. On 6 April, a new tax year begins, meaning we say goodbye to the 2021/22 ISA allowance.
So, if you’ve got a Lifetime ISA, time is running out to maximise your contribution in order to get the full £1,000 bonus for the current tax year. Here’s what you need to know.
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How does a lifetime ISA work?
The lifetime ISA (LISA) was launched in 2017. Anyone aged 18-39 can open one, and you can pay in up to £4,000 per tax year. The government adds a 25% bonus to anything you put in.
You can have a Lifetime ISA in cash, or in stocks and shares.
While it may seem a ‘no-brainer’ due to the bonus, there are a number of caveats that you should bear in mind before you open an account. Firstly, the government bonus is only paid to those who’ve had an account open for at least a year.
In addition, you can only access the bonus if you’re using your LISA for:
- A deposit on your first home (costing £450,000 or less)
- Retirement (aged 60+)
If you want to access your LISA for any other reason, bar terminal illness, then you’ll have to pay a 25% charge on anything you take out.
How does the ISA deadline apply to the Lifetime ISA?
You have just over two weeks to use up this year’s £20,000 tax-free ISA allowance. This covers you for all types of ISAs, including your LISA. Remember, anything you put into an ISA stays tax-free year after year.
The maximum you can put into a LISA in any given tax year is £4,000. So, if you’ve already maxed your LISA for 2021/22, then you can still put another £16,000 into other types of ISAs to make the most of your total allowance.
Importantly, if you don’t max out your LISA allowance, then you won’t be able to grab the maximum £1,000 government bonus available for the current tax year. As a result, if you have a LISA to actively save either for a house purchase or for retirement, then it’s seriously worth paying in as much of the £4,000 limit as possible before April 5.
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How can you open a Lifetime ISA?
If you’re keen to open a LISA, then you’ll have to consider which provider is best for you. You’ll also have to consider whether you want to open a cash LISA or a stocks and shares LISA.
Currently, rates on cash LISAs are as low as 0.85%. So, if you’d rather invest in a stocks and shares ISA and take your chances that you’ll see a higher return, then it’s worth knowing that a number of providers offer LISA products.
Hargreaves Lansdown is one such provider, and it’s one of The Motley Fool’s top picks thanks to its low fees.
Are you looking to learn more about opening a LISA? Take a look at our comprehensive lifetime ISA guide.
Do you have a Help to Buy ISA?
The Help to Buy ISA preceded the LISA and is no longer available. That said, if you have one, you can still contribute to it until November 2029. After this date, you have another year to use your bonus, which must be used for a house purchase. Unlike the LISA, the Help to Buy ISA doesn’t offer a bonus to support retirement.
If you have a Help to Buy ISA, then you can transfer your balance to a LISA. However, anything you transfer will count towards your annual £4,000 LISA allowance.
For more information, see our Help to Buy ISA guide which explains all of your options.
Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
