Guide to Lifetime ISAs
Lifetime ISAs are tax-efficient long-term savings accounts that come with a government bonus. Read our guide to find out how to choose the best lifetime ISA for your savings goal
Key takeaways
LISAs are government-backed savings accounts, intended to help you afford your first home or fund retirement
The government will add £1 to your account for every £4 you save into your LISA. With a maximum savings limit of £4,000 per tax year, you could get back a top-up of up to £1,000 per year
The cut-off age for opening a LISA is 40, but you can continue to contribute until you're 50
If you withdraw funds before age 60 for non-qualifying reasons, you will forfeit your government bonus in full
What is a Lifetime ISA?
A Lifetime ISA (LISA) is not just any savings account; it's a government-backed initiative designed to encourage individuals to save for two significant life events: purchasing their first home and retirement.
LISAs are available as stocks and shares ISAs, where you're invested in the stock market, or cash ISAs, where you earn interest on your savings.
And just like standard ISAs, Lifetime ISAs are subject to an annual ISA allowance and you can open your Lifetime ISA account online.
How do Lifetime ISAs work?
Here are the key things you need to know:
Government bonus: For every £4 you save, the government adds £1, up to a maximum of £4,000 per tax year. This means you could receive an annual top-up of £1,000, free money that can significantly boost your savings. The bonus is added each year and is paid on the contributions you make up until the age of 50. You can continue to save into the account after that but no more government bonus will be paid.
Contribution window: You can open a LISA up to the age of 40 and continue to contribute until you're 50. The earlier you start saving, the more you can benefit from the government bonus.
Flexible use: You can use your LISA savings to buy your first home at any point, or you can wait and withdraw the funds at age 60 for any purpose
One Lifetime ISA annually: You can open one new Lifetime ISA per year.
What restrictions apply to Lifetime ISAs?
It's important to note that withdrawing funds before age 60 for non-qualifying reasons comes with a steep 25% penalty, which could eat into your original savings as well as the bonus.
If you withdraw cash from your Lifetime ISA before you’re 60 for any other reason than to buy a home, you’ll face a government withdrawal charge, which is a penalty of 25% of the amount in the account. This effectively means the bonus and more would be lost.
How do I choose between cash and stocks and shares LISAs?
When it comes to LISAs, you have two options: cash or stocks and shares. Each type of ISA has its merits, depending on your risk tolerance and financial goals.
Lifetime cash ISAs
Cash LISAs offer a lower-risk savings path, with a fixed interest rate, no income tax to pay and the government's 25% bonus. The interest rates vary by provider, and while you can open a regular cash ISA at 16, you must be 18 to start a LISA.
Lifetime stocks and shares ISAs
As with a cash Lifetime ISA, you can save up to £4,000 tax-free per tax year and benefit from the 25% government bonus. The difference is that rather than putting your money in a cash saving scheme, a stocks and shares Lifetime ISA is an opportunity to invest in stock market assets, also known as equities. While there is a chance for your investment to grow, an equity-linked ISA also comes with risk. It means your money could fall in value as well as rise – so you could lose money if the stock market falls.
What can I use a LISA for?
1. Buying your first home
The LISA shines when it's time to lay down roots. If you're eyeing your first property, there are a number of things you'll need to note carefully:
Property price cap: Your first home must cost less than £450,000 anywhere in the UK
Living arrangements: You must intend to live in the property; it cannot be used for buy-to-let purposes
Joint purchases: If you're buying with another first-time buyer who also has a LISA, you can both use your savings towards the home. However, the property price cap remains unchanged.
If you use the money to pay for a deposit on your first home, you can continue saving into your Lifetime ISA after you've purchased your property.
You will still get the government top-up until age 50 even after you’ve bought your first home.
To find out more about buying your first home and the potential costs, take a look at our mortgage calculator.
2. Retirement
If you're not using your LISA for a home purchase, the funds should remain untouched until you reach 60. At that point, you can withdraw the money for retirement or any other needs, free from the earlier restrictions.
The Lifetime ISA allowance
The annual LISA contribution limit is part of the broader £20,000 ISA allowance. Here's what you need to know:
Annual limit: You can contribute up to £4,000 each year to your LISA
Government contributions: These are on top of your annual limit, meaning more bonus money for you
For example, saving £4,000 annually from age 18 to 50 could result in a £160,000 LISA pot, including a £32,000 government bonus.
From April 2027 only £12,000 of your £20,000 annual ISA contribution allowance can be saved in cash. The rest must be invested in stocks and shares. This does not apply to people aged 66 or over, who can continue to save their full ISA allowance in cash if they wish.
The pros and cons of Lifetime ISAs
Advantages
Government bonus: A 25% top-up on your savings is a significant incentive for investors
Flexibility: Free transfers between LISA providers and the option to transfer from other ISAs
Savings protection: Savings covered up to £120,000 - Your money in both cash and investment Lifetime ISAs benefit from the protection of the Financial Services Compensation Scheme. This protects your investment up to the first £120,000 in the event the savings or investment provider goes bust. With stocks and shares ISAs, you’re not protected against fluctuations in the value of your investment due to stock market falls, but you are protected if the ISA provider goes under
Complementary: Can be used alongside other schemes and long-term savings like pensions
Disadvantages
Usage restrictions: The LISA is limited to first home purchases or retirement, with penalties for other withdrawals
Contribution cap: The annual limit is £4,000, which may not be sufficient for all savers
Penalties: A 25% penalty for non-qualified withdrawals can be harsh
Age limits: You can't start a LISA after age 40, and the bonuses stop at age 50
Property restrictions: The first home must cost under £450,000 and cannot be a buy-to-let property
How do I open a Lifetime ISA?
The simplest way is to open an account online. You can usually open an account from £1 up to the annual limit of £4,000.
You’ll just need proof of your identification and address. You can easily find and apply for a Lifetime stocks and shares ISA with MoneySuperMarket.
Other useful guides
Compare Lifetime ISAs with MoneySuperMarket
You can open Lifetime ISAs direct with your chosen provider. If you’re looking for the best stocks and shares Lifetime ISA, you can view accounts from our panel of providers.
Your capital is at risk, please be aware that with a stocks and shares ISA the value of your investment can go down as well as up and you may get back less than you invest. ISA and tax rules apply.
Frequently asked questions
Can I transfer old ISA accounts?
You can transfer the funds in your old ISA accounts to a new ISA – subject to ISA transfer rules (which will preserve their tax-free status) and the terms and conditions of individual savings providers.
While many banks and building societies will allow you to transfer old ISA savings into new accounts with competitive rates, some do put restrictions on transfers into new accounts, so check the terms of your new ISA account first.
Can I transfer Help to Buy ISA to Lifetime ISA?
Yes, you can transfer your Help to Buy ISA to a new Lifetime ISA. You can do this by contacting your Lifetime ISA provider to transfer your HTB ISA for you.
How many Lifetime ISAs can I have?
You can hold as many Lifetime ISAs as you wish provided you only pay into one in each tax year and do not exceed the £4,000 annual limit.
Is my money safe in a Lifetime ISA?
Lifetime Cash ISA: When it comes to the money you’ve saved in a cash LISA, your savings are protected up to £120,000 per banking institution. It’s important to remember your savings are protected by a financial institution and not your account. This means if you have multiple savings accounts with the same banking group as your Lifetime ISA savings it could take you over the protection limit.
Stocks and Shares Lifetime ISA: Stocks and Shares LISAs come with investments risks – as your investments could go up or down in value. When it comes to FSCS protection in this scenario, you’re protected if you lose money if your bank or LISA provider goes bust. But you are not protected if the company you’ve held your shares in goes bust – as this is the risk of investing. Likewise you’re not protected from general investment losses and falls in the stock market and the value of your underlying assets.
What happens if my house purchase falls through after I’ve closed my LISA?
According to GOV.UK, if the house purchase falls through after the withdrawal and closure of your Lifetime ISA, the conveyancer must return the withdrawn amount to the ISA’s account holder.
Author
Victoria Russell
General Manager - Commercial
Vikki has worked across financial services for over 20years, and for the last 15 years, created and nurtured a career within MoneySuperMarket Group, leading to her current role as General Manager for...
