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Lifetime ISAs

Save towards your first home or for retirement with a Lifetime ISA

published: 28 October 2021
Read time: 5 minutes

Lifetime ISAs are tax-efficient long-term savings that come with a government bonus. Our guide explains who they might suit and who is eligible

What is a Lifetime ISA?

A Lifetime ISA (LISA) is a tax-efficient savings wrapper designed to help you save enough money to buy your first home, save for a comfortable retirement – or both.

As with regular ISAs you can have either a cash or stocks and shares Lifetime ISA and a government bonus is paid on your savings. You can only open an account before you turn 40.

Man and woman sitting on the floor

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 only 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 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

Be aware if you withdraw cash before you’re 60 for any other reason than to buy a home, you’ll face a penalty of 25% of the amount in the account. This effectively means the bonus and more is would be lost. This is why a Lifetime ISA should be seen as locking money away for the long term.

You have a choice of two types of Lifetime ISAs, either:

1. Lifetime cash ISAs

Lifetime cash ISAs can be seen as a A risk-free and 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 rate offered you’ll be offered will differ between providers. While regular cash ISAs can be opened by those turning 16,once you turn 16, you’ll have to wait until you’re at least 18 for a cash Lifetime ISA.

2. 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 the 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.

When will the LISA bonus be paid?

The bonus you’ll receive with your Lifetime ISA will be paid It is 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.

If you opened a Lifetime ISA at 18 and ran it for 32could run a Lifetime ISA for 32 years, saving a maximum of £128,000 (£4,000 per year) and earning a government bonus of £32,000, giving 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 equity assets you invest in.

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 a range of 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 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 the scheme after the purchaseyou’ve purchased your property.

To find out more about buying your first home, 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 retirement or for whatever you need for anything else you’d like..

What is the Lifetime ISA allowance?

You can 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 for the 2021/22 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 limit, the higher the bonus you will receive – up to a maximum of £1,000 a year.

How to choose the best Lifetime ISA

Like other savings and investments, choosing the best Lifetime ISA depends on the rates or return you want and your attitude to risk, among other considerations.

1. Cash or equity?

A stocks and shares (equity) Lifetime ISA can potentially give bigger returns in the long term, but you also must accept the risk that your investment may diminish. A cash Lifetime ISA avoids this risk, but the interest rate may be low.

Not all stocks and shares Lifetime ISAs are the same. Some are aimed at more adventurous investors who are prepared to take more risk with their cash for the potential to earn high returns. Others are designed for more cautious investors who want a slow and steady approach to capital growth.

If you’re struggling to decide, it’s worth remembering that the 25% government bonus is likely to be by far the most important reason to open a Lifetime ISA, and both cash and stocks and shares options offer this. You can also transfer Lifetime ISAs if you spot a better provider.

2. How close are you to buying a house or retiring?

If you’re saving for retirement a long way into the future, or you don’t plan on buying your first home for at least a decade, then a Lifetime stocks and shares ISA may be preferable. Investment returns could be better over a longer period and allow you to ride out any peaks and troughs.

But if you want to save over a shorter time frame – perhaps to buy a home in a few year’s time, you may feel a Lifetime cash ISA is a better option as there will be no risk to your capital.

3. Consider the interest rate

If you’re thinking about a cash Lifetime ISA you can compare accounts by their interest rate. It’s worth checking whether these rates are fixed and for how long – for example, are they just for an introductory period only? – and balance it against any annual fees you might have to pay.

4. Do you want to transfer old ISA accounts?

It is possible to 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.

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 and subject to the providers 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.

  • Used 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, and 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 have a terminal illness diagnosed.

  • 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.

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.

Where can I open a Lifetime ISA?

You can open Lifetime ISAs direct with your chosen provider. If you’re looking for the best stocks and shares Lifetime ISA, you can also 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.

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