Lifetime ISAs (LISAs) explained

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A lifetime ISA is a tax-free, long-term savings account geared towards helping people save for a first home or retirement. You can save up to £4,000 each tax year into your lifetime ISA, which the government will top up with a bonus of 25%, paid monthly. For those who are looking to get onto the property ladder or put money aside for later life (and get a little help along the way), a government lifetime ISA may be worthwhile. This page explores the lifetime ISA rules, how the bonus works and who can benefit, and whether a lifetime ISA is right for you. As always, it’s important to consider a range of savings accounts to find the best option for your needs.

The rundown
  • Financial milestones: A lifetime ISA is a tax-free savings account designed to help you buy your first home or save for retirement
  • Lifetime ISA bonus: The government tops up your lifetime ISA savings by 25%, up to a maximum of £1,000 a year
  • Lifetime ISA eligibility: There are various lifetime ISA rules and restrictions to be aware of, meaning this type of account may not be suitable for everyone

What is a lifetime ISA?

A lifetime ISA, or LISA, is a government tax-free savings account to help young people aged between 18 and 39 kick-start their financial future or save for retirement. The LISA is designed to help you save for a first home costing up to £450,000 or a nest egg for your retirement.

How does a lifetime ISA work?

If you have a lifetime ISA, the government will grant you a 25% bonus on your contributions each month, which can encourage you onto the property ladder or to build your savings for later life. You’ll get this bonus in addition to the interest earned on your account, and it’s treated as part of your savings, so you’ll earn interest on it as well.

There’s no limit to how much you can save over the course of your lifetime ISA, but to be eligible for the 25% lifetime ISA bonus, you can only transfer a maximum of £4,000 per tax year into your ISA until you’re 50.

You can hold cash or stocks and shares in your lifetime ISA, or have a combination of both.

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The lifetime ISA rules

There are certain restrictions around a lifetime ISA which you’ll need to check before deciding if this is the right kind of savings account for you. As when opening any kind of savings account, you should always look for the most competitive interest rates and the best terms and conditions to suit your needs.

The lifetime ISA rules for opening and holding an account are as follows:

  • You must be between 18–39 years old to open a lifetime ISA
  • You must make your first payment before you turn 40
  • You can continue to pay into your lifetime ISA until you are 50 years old
  • If you’re opening a lifetime ISA to buy a property, you cannot already be a homeowner
  • The government will pay 25% on your savings (the lifetime ISA bonus is capped at £1,000 a year)
  • You can transfer up to a maximum of £4,000 per tax year into your lifetime ISA
  • The lifetime ISA bonus should be paid into your account monthly, as long as you’ve contributed money that month
  • If you do not use the money for your first property, or you withdraw the money before you turn 60, you may have to pay a 25% penalty. The only exception to this rule is if you’ve been diagnosed with a terminal illness
  • The £4,000 annual lifetime ISA limit counts towards your annual ISA allowance, which is £20,000 for the 2023/24 tax year

Using the lifetime ISA to buy your first home

If you’re planning to save for a deposit to buy your first home (or you think there’s a chance you might in the future), a lifetime ISA may be a good option. However, as we touched upon above, there are a few conditions you’ll need to meet.

To use your lifetime ISA to buy a house or other property, you must have never owned a property in the UK or overseas before. This includes owning a property (or a share of one) that you inherited, even if you never lived there. Crucially, you should be buying a residential property that you intend to live in, so you can’t purchase a property with the intention of renting it out straight away. As the lifetime ISA is designed to help people buy their first home, you’ll also need to purchase the property with a residential mortgage – cash buyers or those with a buy-to-let mortgage aren’t eligible.

Price is another consideration when it comes to the lifetime ISA for first-time buyers. To use your lifetime ISA savings and bonus towards your property purchase, the property should cost £450,000 or less. Alternatively, you can use your lifetime ISA to buy land for a self-build property, providing the purchase meets all the other criteria. You can also use the money in conjunction with other government schemes such as shared ownership, Help to Buy loans and Right to Buy.

If you’re considering a lifetime ISA, bear in mind that your account will need to be open for at least 12 months before you can use the funds (and government bonus) to buy a property. So, if you intend to purchase a property within a year, you might like to look at alternative savings options. On the plus side, if you’re buying a property with another first-time buyer (e.g. your spouse, partner etc), you can both open a lifetime ISA, effectively doubling the government bonus.

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Saving for retirement with a lifetime ISA

While a lifetime ISA can be a tax-efficient way of saving for retirement in some cases, there are some caveats.

The rules state you must open a lifetime ISA before the age of 40, although you won’t be able to access the funds until your 60th birthday. This means you’ll need to be prepared to wait at least 20 years before you can access your cash, which may not be ideal if you plan to retire early. However, once you turn 60, you can withdraw your funds (including the government bonus) and spend the money as you wish.

It’s worth noting that you don’t need to take all the cash out in one lump sum; you can leave some or all of the money invested if you prefer. Any withdrawals you do make will be tax-free, although bear in mind that your lifetime ISA savings can affect your entitlement to certain benefits.

Lifetime ISA vs pension: which is better for you?

Although a lifetime ISA has its advantages, for many people, paying into a pension may be more effective. If you’re employed, the auto-enrolment rules stipulate that your employer must also contribute to your pension; they don’t have to do this with a lifetime ISA. What’s more, as pension contributions are deducted from your pre-tax salary, you’ll benefit from national insurance relief as well as tax relief. For higher rate taxpayers, the advantages of a pension over a lifetime ISA are even greater as they’ll receive 40% tax relief on their pension contributions. Lifetime ISAs, on the other hand, provide a government bonus of 25% on contributions, regardless of the income tax rate.

Whether a lifetime ISA is right for you depends on your individual circumstances and your savings goals. If you’re unsure about the best option, speak to a financial adviser.

The pros and cons of a lifetime ISA

If you’re thinking of opening a lifetime ISA, it’s always a good idea to weigh up the pros and cons. A lifetime ISA has a lot of benefits, but it’s worth looking into how it works in detail to check if it’s right for you.

What are the advantages of a lifetime ISA?

  • 25% bonus: One of the biggest lifetime ISA benefits is that you can earn tax-free money on your savings. For every £4 you place in your lifetime ISA, the government will top that amount up by an extra £1 until you hit the £4,000 tax year limit.
  • You can transfer for better rates: While lifetime ISA interest rates are variable and can change at any time, you don’t have to stick to the provider you opened your account with. You’re free to transfer your LISA to a different provider if you see a better deal. However, it’s important to check the terms and conditions of each account before proceeding.
  • Tax benefits: Another bonus with the lifetime ISA is that when you withdraw your savings, they will be tax-free. In addition, any compound interest earned on top of your savings will be tax-free too. You also get your government bonus paid on a monthly basis, which means you can benefit from any compound interest paid. What’s more, the interest you earn won’t affect your personal savings allowance. This means that you can still have a standard savings account and benefit from earning up to £1,000 a year of tax-free interest as a basic rate taxpayer (or £500, if you’re a higher rate taxpayer).
  • Savings boost: If you’re saving for retirement, you can continue benefiting from the monthly interest right up until you reach the age of 50. This means that even if you open a lifetime ISA later in life, you can still benefit from the 25% bonus and any interest, which will give your savings a boost when it’s time to withdraw your cash. Again, you won’t pay any tax when it’s time to withdraw your funds.

What are the disadvantages of a lifetime ISA?

  • Maximum contributions: The lifetime ISA limits you to transferring £4,000 maximum per tax year, and this amount counts towards your annual overall ISA allowance of £20,000. This leaves you with £16,000 to divide between other ISA accounts and stocks and shares. The lifetime ISA maximum contribution might not be sufficient if you have a higher income or are looking to save larger amounts towards your first home or retirement.
  • Price limit for first home: Similarly, the lifetime ISA house price limit of £450,000 might be unrealistic for the type of property and the location you are aiming to save for, and this figure might not keep up with inflation over the years. If you’re aiming to purchase a property in London or the South East, for example, you might struggle to find one that comes in under the LISA house price limit.
  • Restrictions on use of funds: There are also limitations on how you use the funds from your lifetime ISA. A penalty of 25% of your funds may be applied if: you don’t use the funds to buy your first home, or you withdraw the money before the age of 60. This charge means that any gains you made from the lifetime ISA bonus could be wiped out, and shows why the LISA is meant for locking away your funds for the long term.
  • No short-term access: If you’re saving for retirement, you’ll be able to pay into your lifetime ISA and earn the government top-up until the age of 50, but you won’t be able to access the funds until you are 60. So, while the LISA offers long-term benefits, it might not be the best option for short-term savings goals.
  • Financial security: Unlike a pension, any money saved in a lifetime ISA will be treated as a normal asset when it comes to bankruptcy cases. This could potentially affect your financial security in retirement if you come into financial difficulties.

Is a lifetime ISA worth it?

A lifetime ISA can be worthwhile if you’re saving towards retirement or for your first property, because any interest, dividends, or profit you make is free from tax. The main advantage is the government will top up your savings account by 25%, up to a maximum of £1,000 per tax year.

If you’re saving for your first property or are comfortable with your money being locked away for a long period, the cash lifetime ISA can be a good option for saving. Even if you’re not sure that you’ll end up buying a house in the UK, while you are within the lifetime ISA age limits it can be worth opening a LISA with just £1 and potentially adding to it at a later stage. And even if you don’t add to it, you won’t have lost much.

If you’re saving for retirement and have several years until retirement age, you might like to consider a stocks and shares lifetime ISA. However, it’s important to be aware that when you invest in a stocks and shares LISA, your investment value can fluctuate, and there’s a possibility that you might make less money than what you initially invested. Depending on your employment and income tax situation, it’s generally worth investing in a pension alongside, or instead of, a LISA.

The best lifetime ISA or savings account for you is ultimately the one that helps you meet your savings goals and suits your individual preferences. If you’d prefer a more flexible savings account that doesn’t restrict where your savings can be spent, you may want to consider a different type of ISA, for example a cash ISA or flexible ISA, or a fixed rate bond. For a more detailed exploration of your savings options, read our guide to see whether an ISA or savings account is right for you.

How to find the best lifetime ISA providers

As when opening any type of savings account, it’s important to compare a range of lifetime ISA account providers as interest rates can vary significantly. It’s also essential to read the small print; some lifetime ISAs require a minimum opening deposit while others don’t accept transfers from other ISAs. And if you’re thinking of opening a stocks and shares lifetime ISA, remember to check the management fees and charges. High fees can erode the value of your investment over time.

Once you’ve identified a lifetime ISA provider that works for you, you’ll need to apply directly with them to open an account. After you’ve opened an account, it’s a good idea to keep an eye on the rate to ensure it remains competitive. Don’t be afraid to transfer your lifetime ISA to another provider if you find a better deal; loyalty doesn’t always pay.

How do I open a lifetime ISA?

To open a lifetime ISA, you’ll need to provide some essential details such as your name, date of birth, address, and national insurance number. Your chosen lifetime ISA account provider will then use this information to check that you’re a UK resident (or crown servant, their spouse, or civil partner), and that you meet the other lifetime ISA eligibility criteria.

How many lifetime ISAs can I have?

You can hold multiple ISAs, but you can only open and pay into one lifetime ISA every tax year. It’s also important to remember that the £4,000 lifetime ISA limit counts towards your overall annual £20,000 ISA allowance.

What are the alternatives to a lifetime ISA?

You might want to consider alternatives to the lifetime ISA, to find the best option for your needs.

If you aren’t eligible to use your lifetime ISA funds, perhaps because you want to buy a property within a year of opening the account, it may be worth considering a notice account. This type of account allows you to take advantage of competitive variable interest rates and still have the flexibility to withdraw your money after a set notice period (typically between 30 and 180 days).

Alternatively, if you’re seeking the most competitive interest rates and don’t mind locking away your money for a specific period of time, a fixed rate bond could be a good option. With a fixed rate bond, you’ll see financial growth on your savings over a certain amount of time (anything between six months and five years), while knowing that you can access your money once the agreed period has ended. Other options include opening a stocks and shares ISA or setting up a personal pension plan.

Grow your savings with Raisin UK

Although we don’t currently offer lifetime ISAs at Raisin UK, you can compare a range of other types of savings accounts from our partner banks and building societies through our marketplace. Simply register for a Raisin UK Account (it’s free!) and then log in, apply for your chosen savings account, and transfer your deposit.

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