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Lifetime ISAs

Guide to Lifetime ISAs

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Written by  Ella Jukwey
5 min read
Updated: 27 Oct 2023

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

What is a Lifetime ISA?

A Lifetime ISA (LISA) is a type of ISA created to help people save for their first home, retirement or both. One of the biggest draws of a Lifetime ISA is that it’s tax-efficient and the government will top up your savings. You can only open a Lifetime ISA account before you turn 40.

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How do Lifetime ISAs work?

Under the terms of the Lifetime ISA scheme, the government will pay in £1 for every £4 you save. 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 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. Money in a Lifetime ISA account can be used at any time to buy a first home. Otherwise, it should remain in the account until you reach 60. At this point, you can access the funds.

This means you can:

  • Open a Lifetime ISA up until the age of 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 

Be aware 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. This is why a Lifetime ISA should be seen as locking money away for the long term.

What types of Lifetime ISA are available?

There are two types of Lifetime ISAs for you to choose from: 

Lifetime cash ISAs 

Lifetime cash ISAs can be seen as a lower risk, tax-free way of saving. You receive the fixed interest rate from the savings provider, as well as the 25% Government top-up. The interest rates on offer will vary between providers.  You can open a regular cash ISA when you turn 16 and eligibility for a Lifetime ISA will require you to be 18 years old to open an account.

Lifetime stocks and shares ISAs 

As with a cash Lifetime ISA you can save up to £4,000 tax-free 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.

If you have invested £4,000 in a Lifetime ISA – either cash or stocks and shares, - you still have a tax-free ISA allowance of £16,000 to use in other types of ISA (in the current tax year 2021-22). This is because everyone has an annual £20,000 tax-free ISA allowance.

Which Lifetime ISA is right for me?

The Lifetime ISA most suited for you will depend on your appetite for risk and your financial goals. A Lifetime cash ISA is more suited to long-term goals such as buying your first house or saving for retirement. If risk isn’t a deal breaker then the Lifetime stocks and shares ISA could be an option for you because you could see sizeable returns.

However as investing into the stock market carries risk, you also face the prospect of the value of your investment going down. With both Lifetime ISA schemes, you can benefit from the government bonus which can be a boost to your savings.

What can I use a Lifetime ISA for?

You could use a Lifetime ISA for a range of purposes, including: 

1. Buying your first home 

You can use the money you’ve saved in a Lifetime ISA to buy your first home at any time. But there are terms and conditions linked to this.

For example, you can only use Lifetime ISA cash to fund a deposit if the property you are buying costs less than £450,000 and the property is in the UK. You must also live in the property yourself and not rent it out.

If you are buying a home with another first-time buyer who has a Lifetime ISA, you can use both sets of LISA funds but the value of the property must still not exceed £450,000.

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, head to our first-time buyer guide and take a look at our mortgage calculator.

2. Retirement 

If you don’t use the money from your Lifetime ISA to buy your first home, it should remain in the account until you reach the age of 60 – but keep in mind the bonus stops being paid from your 50th birthday. 

Once you’ve reached 60, you can use the money to help fund your later-life plans or for whatever you need for anything else you’d like.

What is the Lifetime ISA allowance?

You can invest 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 for each tax year. 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 ISA limit, the higher the bonus you will receive – up to a maximum of £1,000 a year.

When is the Lifetime ISA bonus paid?  

The bonus you’ll receive with your Lifetime ISA will be paid monthly, as long as you’ve contributed that month, and takes between four and nine weeks to arrive.

The bonus is up to £1,000 for each tax year and is only paid on new contributions, not the interest or investment growth.

For example, if you opened a Lifetime ISA at 18 and saved for 32 years, saving a maximum of £128,000 (£4,000 per year) and earning a government bonus of £32,000, you could end up with a total Lifetime ISA pot worth £160,000.

With a cash Lifetime ISA, interest would also be earned (tax-free) on the savings as they accrued - further boosting your nest egg.

With a stocks and share Lifetime ISA, the overall amount will be determined by how the account performs over the years - and this is down to the performance of the underlying stock market index and the assets you invest in.

Pros and cons of lifetime ISAs

Advantages of a Lifetime ISA 

Here are some advantages that can come with Lifetime ISAs: 

  • 25% government bonus - This is a big bonus compared to almost any other investment and makes it worth opening an account for anyone under 40 

  • Transfers are free - Once your Lifetime ISA is opened, you’re free to transfer it to another LISA provider if you spot a better deal but this will be subject to the provider’s own terms and conditions 

  • Transfer from a regular ISA - If you hold cash in other ISAs you might be able to transfer the money into your Lifetime ISA, allowing you to take advantage of the bonus. Again, transfers are usually subject to the terms and conditions of individual ISA providers 

  • Savings covered up to £85,000 - 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 £85,000 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 

  • Option to use with other schemes - You can use the Lifetime ISA with other schemes including Right To Buy, shared ownership and Help to Buy loans. You can also use it if you’re self-building a property 

  • It’s not a pension - 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 also benefiting from the Lifetime ISA bonus at the same time 

Disadvantages of a Lifetime ISA

 Here are some potential disadvantages of Lifetime ISAs to consider: 

  • Limited in its use - The money must either be used to buy a first home or eventually for retirement. If you attempt to withdraw it for anything else, you’ll pay a big penalty 

  • £4,000 a year cap - You can invest up to £4,000 every year into your Lifetime ISA. If you want to put away more money than that, you’ll need to look elsewhere. However, this still leaves £16,000 to put in a tax-free regular ISA each year   

  • Penalty for withdrawals - If you need the money for anything other than buying your first home or retirement once you reach 60, you face a 25% penalty on your ISA. This could more than wipe out any gains you’ve earned from the government bonus. The only exception is if you’re diagnosed with a terminal illness.  

  • Can’t start it after 40 - If you haven’t started a Lifetime ISA by the time you turn 40, it’s too late. You can also only keep getting the 25% bonus until the age of 50 

  • First home must be under £450,000 - If you’re a first-time buyer and you’re paying more than £450,000 for your home you won’t be able to use the funds from your Lifetime ISA   

  • Property can’t be a buy-to-let - The Lifetime ISA is intended to help you buy your first home, not an investment property you will let out to tenants   

  • Wait at least a year - You’ll need to have had the LISA opened for at least 12 months before you can use it to buy a home

How to open a lifetime ISA 

Lifetime ISAs are simple to open for anyone aged between 18 and 39 and living in the UK. 

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 

We have a range of guides you can read to help you understand ISAs. 

Help to Buy ISA guide   

Stocks and Shares ISA guide   

Cash ISAs explained   

ISAs Explained 

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 £85,000 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.

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