Lifetime ISAs explained – are they the best way to save?

18 min Read Published: 16 Jun 2021

What is a lfetime isa

What is a Lifetime ISA and how does it work?

A lifetime ISA (also known as the LISA) is a long term Independent Savings Account (ISA) introduced in 2016. A lifetime ISA offers all the attractive tax benefits of a standard ISA, but with the additional bonus of a 25% boost provided by the government. The LISA was introduced to help first-time buyers and those looking to save for retirement.

To open a Lifetime ISA you need to be aged between 18 to 40 and a resident of the UK. The maximum annual LISA limit is £4,000 but this is included in your £20,000 ISA limit for 2021/22 tax year. That means you can have a Lifetime ISA alongside a normal stocks and shares ISA, cash ISA or innovative finance ISA. The only caveat is that you have to keep the total contribution below the annual ISA allowance which is £20,000 for the 2021/22 tax year. You can transfer money from any other ISA (including a Help to Buy ISA) into a Lifetime ISA, however this is limited to the Lifetime ISA allowance, which is currently £4,000 for the 2021/22 tax year. So long as you are under 40, you are free to transfer your Lifetime ISA between LISA providers and doing so doesn't affect your annual payment limit. As with other types of ISA, you can only make contributions into one Lifetime ISA in each tax year.

You qualify for bonus contributions on the Lifetime ISA (up to a maximum of £1,000 per year) until the age of 50 at which point you will no longer be able to pay in and the government bonuses stop. Your account will stay open and you will continue to earn interest. The maximum bonus any one person can get with a LISA is £33,000, assuming you have opened an account from the age of 18 and keep it open until the age of 50. However, if you are born on 6th April, this is capped at £32,000.

Couples can each open a Lifetime ISA and both earn the bonus, as long as they are both eligible. The government bonus will be paid monthly and once the bonus is paid it will gain interest or investment growth as if it was the investor's own money.

Lauren summarises Lifetime ISAs in the video below. But for a more detailed explanation of Lifetime ISAs continue to read the article.

 

Lifetime ISA types

Investment Lifetime ISAs (Stocks and Shares Lifetime ISAs)

Lifetime ISA contributions can be invested in a range of investments such as stocks & shares and investment funds. This is known as a stocks and shares Lifetime ISA or stocks and shares LISA. It is important to note that an investment Lifetime ISA carries more risk than just holding your contributions in cash as your investments can go down as well as up and, therefore, should be held for a minimum of 5 years

If you are looking to use a Lifetime ISA to buy a house in 2 or 3 years, then a cash Lifetime ISA may be the best option as the interest earned is guaranteed. If you are looking to use a Lifetime ISA to save for retirement then an investment Lifetime ISA may suit you better as you could benefit from the likelihood of better returns over a longer period (stocks and shares tend to outperform cash over the long term). However, investments can go up and down in value unlike cash savings. Our article 'compare the best and cheapest Lifetime ISA' includes a table comparing all the available stocks and shares Lifetime ISAs.

Cash Lifetime ISAs

Contributions into a Lifetime ISA can be held in cash and will earn interest just like a normal savings account but with the added benefit of being tax-free and qualifying for the government 25% bonus.

Don't forget to make sure you are getting the best interest rate available on your contributions by shopping around, and there is nothing stopping you from moving a Lifetime ISA from one provider to another in order to improve your interest rate. We compare the interest rates for all cash Lifetime ISAs in our article 'the best and cheapest Lifetime ISA'.

Can you withdraw the money held in a Lifetime ISA?

Lifetime ISA withdrawals are free if you are:

  • Using the proceeds towards buying a first home
  • Aged 60
  • Terminally ill with less than 12 months to live
  • Transferring a Lifetime ISA to another provider

If you want to withdraw your investment for any other reason then you will have to pay a penalty of 25% of the amount withdrawn and is perhaps the major drawback of a Lifetime ISA. The penalty could mean that you get back less than you paid in.

What can a Lifetime ISA be used for?

Property purchase

  • A Lifetime ISA can be used by a first-time buyer towards purchasing a property once the account has been held for 12 months. So if you want to buy a house in less than 12 months time a LISA is not for you, but a Help to Buy ISA may be the preferred option if you opened one prior to the November 2019 deadline.
  • Any property purchased must be valued at £450,000 or less and must be the first property owned, wholly or in part, by the applicant. While the property value limit seems high it may restrict those buying a property in London due to the inflated property market there.
  • If you are looking to buy in London there are some new government schemes in place to help you buy your new home; explained in more detail by the money advice service.
  • The money saved in a Lifetime ISA will be paid directly to the conveyancer/solicitor not directly to the investor
  • The property purchase must complete within 90 days from the withdrawal. If the property doesn't complete it can be transferred back into the Lifetime ISA with no loss of bonus
  • The Lifetime ISA is designed to help first-time buyers get on the property ladder so all purchases must be made with a mortgage or the 25% bonus will be sacrificed

Retirement

  • A Lifetime ISA can be used to fund retirement once the applicant reaches the age of 60
  • At age 60 all or part of the investment can be withdrawn with any remaining investment left to continue growing
  • All proceeds are tax-free, unlike a pension, but could affect eligibility for some means-tested benefits
  • Contributing to a Lifetime ISA does not have any impact on your workplace pension (if you have one). You can contribute to both

Who can have a Lifetime ISA?

  • Anyone over the age of 18 but under the age of 40
  • A Lifetime ISA is a personal product so a husband and wife or partners can have their own ISA, meaning a couple can have more than one Lifetime ISA
  • Only one Lifetime ISA can be held in any tax year and although you can have more than one Lifetime ISA in your lifetime, you can only get the government bonus paid into one
  • Opening a Lifetime ISA is simple and paying into a Lifetime ISA can be done with regular contributions from a bank account
  • Parents and grandparents can pay into a Lifetime ISA opened by their child or grandchild

Best and Cheapest Lifetime ISA

At present the choice is between eleven Lifetime ISA providers; although this does not seem a lot, this has increased by eight since 2017. Our 'Compare the best and cheapest Lifetime ISA' article summarises the providers and which ones offer the best and cheapest Lifetime ISA.

Are Lifetime ISAs worth it?

Lifetime ISA Pros

  • The government bonus of 25% is generous and will boost any savings made
  • All proceeds from a Lifetime ISA are tax-free
  • Easy to open with low minimum contributions
  • Savings in a Lifetime ISA can be held in cash or invested in a range of products through an investment platform
  • If investing to finance retirement then all withdrawals will be tax-free, whereas pension income is taxed at the recipient's marginal rate. I do however have reservations about the suitability of a LISA for retirement saving (see below)

Lifetime ISA Cons

  • Proceeds from a Lifetime ISA have to be used for a house purchase or left invested until age 60, otherwise a 25% exit charge will apply
  • There may be better ways to save for retirement such as a pension provided by an employer where contributions may be matched by the employer
  • For higher rate taxpayers it may be more beneficial to invest in a pension as they will receive 40% tax relief on their contributions
  • Benefits from a pension can be taken from age 55 rather than age 60 for a Lifetime ISA
  • Lifetime ISAs are subject to the whim of future governments and may be altered or withdrawn at any time

Lifetime ISA vs Help to Buy ISA

  • You can no longer open a Help to Buy ISA, the deadline to take out a Help to Buy ISA was 30th November 2019.
  • The Help to Buy ISA was launched in December 2015 and just like a Lifetime ISA the government add a 25% bonus to any investment
  • Whilst an investor can have a Help to Buy ISA and a Lifetime ISA at the same time only the bonus on one of them will be available to buy a property
  • Investment in a Help to Buy ISA is limited to £2,400 each year, investment in a Lifetime ISA is limited to £4,000 each year. The other big difference is that you can only make monthly contributions (maximum of £200) to a Help to Buy ISA and not lump sum payments (Other than an initial lump sum payment of £1,200 when you open an account). There's no such restriction on Lifetime ISAs
  • Help to Buy ISAs can only be held in cash with no facility to invest in other investments such as stocks and shares or investment funds
  • The maximum property purchase price allowed in a Lifetime ISA is £450,000 whereas a Help to Buy property purchase price is limited to £250,000 (£450,000 in London)
  • A Help to Buy ISA can be opened from the age of 16 with no upper age limit
  • If you already have a Help to Buy ISA (and you are over the age of 18) you can transfer your investment into a Lifetime ISA, investing up to £4,000 per year (meaning you can purchase a property up to a £450,000 purchase price)
  • A Lifetime ISA has to be held for at least 12 months before you can purchase a property whereas a Help to Buy ISA can be used to buy a property once you have saved £1,600 (which is the minimum to qualify for a bonus)
  • You can withdraw money at any time with no fee from a Help to Buy ISA but will face a 25% fee when withdrawing funds from a Lifetime ISA.

Lifetime ISA vs Pension

Lifetime ISA

  • Investment capped at £4,000 per year
  • Government bonus of 25% of contributions in any tax year
  • Contributions are made from post-tax income
  • Investment can be withdrawn from age 60 without losing the government bonus
  • Withdrawals are tax-free after age 60
  • Must be opened before the age of 40
  • Investment liable to inheritance tax
  • Can affect certain benefits
  • Can be used to pay creditors in the event of bankruptcy

Pension

  • Investment capped at £40,000 per year
  • Investment can be withdrawn from age 55
  • Contributions are made from pre-tax income which is equivalent to a bonus of 40% to a higher rate taxpayer
  • Withdrawals are liable to income tax at the recipient's marginal rate
  • Often can be increased by employer contributions
  • Can be started for a child by their parent from birth
  • Not liable to inheritance tax
  • Does not affect benefits
  • Cannot be used to pay creditors in the event of bankruptcy

Is a Lifetime ISA worth it?

There is no definitive answer as to whether a LISA is worth it as it will depend on the circumstances of the individual; the truth is that for some people it will be the right solution but for others, it will not.

The Lifetime ISA was born out of an idea to create a pension-like ISA product and what we actually ended up with was a halfway measure. If you are saving for retirement, then a pension (especially one where an employer will contribute) may be better. Not only can you contribute more into a pension but you also receive tax relief on the way in. In addition, there are no inheritance tax issues plus you can withdraw all of the money once you reach age 55 without any penalties. Of course, there are tax implications on withdrawal and so this will need to be considered.

If you are using a Lifetime ISA to buy your first home you can benefit from the ability to deposit more (meaning you can save quicker). This does, however, come with a fairly big caveat, that being a 25% charge if you want to access your money early (and no access at all within 12 months).

An advantage of a LISA is that once you have withdrawn the money to purchase a property, you are able to continue investing for your retirement, as the LISA was introduced to help investors get used to saving. Overall, a LISA has its advantages and is a good way of saving for a property or retirement but like anything, it has its disadvantages too and it is important to consider these before investing.

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  1. With a stocks and shares LISA, once your past 50, and you can no longer put into it, what happens to dividends. Will they continue to be re-invested or would they have to be paid out?

  2. Hi…is the pay-in deadline for a pension capped at 50yrs of age like the LISA? If i want to keep working until Im 70yrs can a pension keep working for me? Thanks.

    1. Hi Kate

      You can keep paying into a pension beyond age 50. Up to the age of 75 you can still qualify for tax relief on your pension contributions. Beyond that you won’t.

      Best wishes

      Damien

  3. If you intend to buy land to then build your first home, will you be able to use your LISA savings? Or is it limited to bricks and mortar? I assume you’d have to buy land that already has a dwelling or at least planning permission?
    Many thanks for all your information!

  4. I read somewhere that if you are written in someones will to inherit property when they pass away, you are not eligible? I’m not in this relatives will yet but he plans to write me into it soon. Is this true?

    1. If you’ve owned a property before (whether in the UK or not) even if it is inherited you can’t use a LISA to buy a property.

      1. Thanks Damien,
        I don’t own a property currently, but i’m written into someone’s will for the future and when they pass away I inherit 50% off their house. I suppose then, that I could open a LISA now, but if my family member were to pass away before I buy my own property, then I wouldn’t be able to use the LISA funds for property, and would have to perhaps keep it in there for retirement or withdraw?

  5. If I put £4000 towards the end of the tax year will I still get a £1000 bonus by then of that year?

    1. Hi,

      It depends on exactly when you pay into the Lifetime ISA. Lifetime ISA providers do provide guidance on their website over when you will receive the government bonus. But typically it can take 6 to 8 weeks to receive it.

  6. Is the 25% only on money you deposit each year? If I invest £4000 on day one and never put more money in, will I get the full £1000 every single year after due to that initial £4000 balance? Or do I have to invest another £4000 every year in order to get the full £1000 each year?

    1. Hi Jane,

      You only get the government bonus each time you deposit money. So if you want the maximum possible bonus you would have to invest your full allowance every year.

      Best wishes

      Damien

  7. With a LISA do you have to continue pay in every year and what is the minimum amount? Thanks Jackie

    1. Hi Jackie,

      No you don’t have to continue to pay in every year if you don’t want to. Also, the minimum amount that you can pay in will be dependent on the LISA provider but can be as little as £1.

      Best wishes, Damien

  8. Do you have to pay a fee to the building society to manage a cash lisa. Also can i please check that there are no fees etc if the cash lisa is used to buy a house for a first time buyer. Thanks Carol

    1. Hi Carol,

      There are no management fees for a cash Lifetime ISA. It is worth checking with your LISA provider but if the Lifetime ISA is used to buy a property you may incur charges from the solicitors, how much you will pay will depend on the firm.

      Best wishes, Lauren

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