What is the 12 Month Rule for Lifetime ISA?

The 12 month rule for Lifetime ISAs (LISAs) is an important part of the tax-free savings and investment scheme. It dictates how much you can save into a LISA in a single tax year, and when you can access your funds without incurring a penalty. Understanding this rule is essential for anyone considering investing in a LISA.

What is a Lifetime ISA?

A Lifetime ISA (LISA) is a type of tax-free savings and investment account designed to help people aged 18 to 39 save for their first home or retirement. The government will add 25% to any contributions made up to £4,000 per year, meaning that you could get up to £1,000 in bonus payments each year. You can also withdraw money from your LISA at any time without incurring any penalties, provided that it’s used for specific purposes such as buying your first home or retirement. 

How Does the 12 Month Rule Work? 

The 12 month rule applies to Lifetime ISAs when you initially open them. This rule states that you must have held your Lifetime ISA for at least 12 months before you are able to access the funds for either your first home, or for retirement.

Although, you are unable to add funds into your LISA close to your retirement so this point mostly applies to first-time buyers. The best piece of advice available for this would be to open a Lifetime ISA as soon as possible, even if it's with a £1 deposit just to get the ball rolling!

When Can I Access My Funds Without Penalty? 

You can access your funds at any time without penalty provided that it’s used for specific purposes such as buying your first home or retirement. However, if you withdraw funds before you are 60 years old and have held them in your LISA account for less than 12 months then you will incur a 25% penalty on top of any withdrawal charges applicable to your provider. This means that if you withdraw £2,000 from your LISA before 12 months have passed since making your initial contribution then you would incur an additional 25% penalty charge of £500 on top of any withdrawal charges applicable to your provider. 

Conclusion 

The 12 month rule is an important part of understanding how Lifetime ISAs work and when you can access funds without incurring penalties. It’s essential that anyone considering investing in a LISA understands this rule before making any decisions about their savings and investments.