How does the Lifetime ISA work?

With the Help to Buy ISA ending, we take a closer look at the Lifetime ISA and what it could mean for you.

Young couple sitting on sofa having just moved house

Compare savings accounts

Start a search

The government’s Help to Buy ISA scheme will be closing to new customers from 30 November. Here, we look at an alternative for first-time buyers looking to save for a deposit, or if you’re looking to put some money aside for retirement.

What is a Lifetime ISA?

Lifetime ISAs are a tax-efficient savings scheme designed to help people get on the property ladder and/or enjoy a comfortable retirement.

Under the terms of the scheme, the government will pay in £1 for every £4 saved.

The maximum you can invest is £4,000 a year, meaning the 25% government top-up is worth up to £1,000 a year.

The bonus will be added each year, so you can earn interest on it thereafter.

The bonus is only paid on contributions made by the accountholder until he or she reaches the age of 50.

Money in the account can be used at any time to buy a first home. Otherwise, it has to remain in the account until the accountholder reaches 60.

In other words, you can:

  • Open a Lifetime ISA while you’re under 40
  • Make payments into it until you’re 50
  • Buy a first property with it at any time
  • Use the cash for any purpose once you’re 60.

Who can invest in a Lifetime ISA?

To qualify for a Lifetime ISA, you will need to be 18 or over and under 40 on the date you open an account.

You can open an account alongside a standard ISA, a Help to Buy ISA and/or a pension fund. You will also be able to open a Lifetime ISA if you already own a property.

The £4,000 limit, if used, forms part of your overall annual ISA limit.

The ISA allowance for the current 2019/20 tax year is £20,000.

How much can I invest in a Lifetime ISA?

You will be able to invest up to a maximum of £4,000 a year in a Lifetime ISA.

This amount will make up part of your overall ISA allowance, which is £20,000.

The amount the government pays into your Lifetime ISA will be on top of this.

The more you save up to the £4,000 annual limit, the higher the bonus you will receive – up to a maximum of £1,000 a year.

How much will the government contribute to my fund?

Under the terms of the scheme, the government will pay in £1 for every £4 saved.

In other words, they will top your savings up with an extra 25% - pushing the total amount invested in your account to a maximum of £5,000 a year.

The government bonus will be paid into your account at the end of each tax year.

Providing nothing changed in the rules governing the scheme, an 18-year old could run a Lifetime ISA for 32 years, saving a maximum of £128,000 and earning a government bonus of £32,000, giving a total of £160,000.

Interest would also be earned (tax-free) on the savings as they accrued. The amount of interest will vary from provider to provider.

Are there any drawbacks with a Lifetime ISA?

There’s a 25% charge to withdraw cash from a Lifetime ISA except in the situations described below. This in effect repays the government bonus earned to that point.

The charge doesn’t apply if you’re:

  • buying your first home
  • aged 60 or over
  • terminally ill, with less than 12 months to live.

When you turn 50, you can no longer pay into your Lifetime ISA or earn the 25% bonus. Your account will stay open if you take no action, and your savings will still earn interest or investment returns. 

Other restrictions

When it comes to buying property, you can only use a Lifetime ISA to save for a deposit on a first home.

So, if you’re already on the property ladder, you can only use the scheme to save for retirement.

What’s more, first-time buyers can only use Lifetime ISA cash to fund a deposit if the property they are buying costs less than £450,000.

How do Lifetime ISAs differ from Help to Buy ISAs?

Help to Buy ISAs, which have been available since December 2015, are not quite the same as Lifetime ISAs:

  • they are aimed at first time buyers looking to build up a deposit for a house
  • they are open to savers who pay money in regularly
  • you can pay in up to £1,200 in first month and up to £200 a month thereafter
  • for every £4 you put in, the government will add £1 when you come to buy a home
  • the maximum amount you can have in a Help to Buy ISA is £12,000
  • this will attract a government bonus of £3,000, making a £15,000 total
  • you can use the money towards a property costing £250,000 (£450,000 in London).

With a Lifetime ISA, you get the government top-up at the end of each tax year. And you can invest in stocks and shares or cash (Help to Buy ISAs are just cash).

Also, you don’t have to save into a Lifetime ISA each month, or put in the same amount each time. You can invest a lump sum each year if that works for you.

You can use the money in a Lifetime ISA to pay for a deposit on your first home, and continue saving into the scheme after the purchase.

The maximum value of a home for which you can use Lifetime ISA cash is £450,000.

What if I already have a Help to Buy ISA?

You can keep your existing Help to Buy ISA and open a Lifetime ISA alongside, although you will only be able to claim the bonus from one account to buy a property.

Alternatively, you can transfer the amount in your Help to Buy ISA into a Lifetime ISA.

Lifetime ISAs are one per person rather than one per home – so two first-time buyers could use two Lifetime ISA bonuses to buy a home together.

How does a Lifetime ISA compare to a pension fund?

The Treasury is keen to stress that the Lifetime ISA is not a pension and can run alongside other long-term savings accounts.

In other words, you can pay into a pension and get tax relief on your contributions while benefiting from the Lifetime ISA bonus at the same time.

Whether or not a Lifetime ISA is better for you will depend on your personal circumstances.

Employees who receive employer contributions into their pension schemes will also be better off paying into those.

Richard Parkin, head of pensions at investment bank Fidelity International, said: “It will remain best advice for people to stay in their workplace pension and get any employer contribution available to them.

“As the Lifetime ISA is only available to those under 40 and is limited to £4,000 of savings a year, older savers with more to invest will also still find pensions the best option.”

Who offers Lifetime ISAs?

Lifetime ISAs come in both cash and stocks and shares forms.

As such, they are offered by traditional ISA providers such as banks, building societies and fund management companies. These include:

  • Skipton Building Society
  • Nottingham Building Society
  • Newcastle Building Society
  • Nutmeg
  • AJ Bell
  • MoneyBox
  • Hargreaves Landsdown
  • The Share Centre
  • OneFamily

Did you enjoy that? Why not share this article

Take control of your energy bills

Our handy tips and tools will help make sure you never overpay again

Popular guides