Best Lifetime ISAs

Lifetime ISAs explained

What is a Lifetime ISA?

Lifetime ISAs (LISAs) were introduced by the UK Government in 2017 as a replacement for the Help to Buy ISA.

Available to those aged 18 to 39, this type of ISA is specifically designed for saving tax-free towards purchasing a first home or for retirement.

You can deposit up to £4,000 into a LISA each tax-year (this counts towards your annual £20,000 ISA allowance).

Because you can only access the money in a Lifetime ISA to buy your first home or after your 60th birthday, it’s important that you open a LISA with one of these objectives in mind. A LISA isn’t an alternative to a standard savings account or cash ISA.

The main appeal of a Lifetime ISA is that the Government adds a 25% bonus on balances held in the account. This means if you were to pay in the maximum of £4,000 per tax year, you could earn an additional £1,000 on this amount.

Types of Lifetime ISA

There are two types of LISA to choose from: cash Lifetime ISAs and stocks and shares Lifetime ISAs.

With a cash LISA, your provider pays interest on any funds deposited (and on the Government bonus you receive). This is similar to other types of cash ISAs and traditional savings accounts.

The interest rate is usually variable, which means the LISA provider could raise or lower the rate.

In contrast, with a stocks and shares LISA, you’d be investing your money in the stock market instead of receiving interest. While this presents the possibility of greater returns, particularly if you invest for the long-term, you must be aware that the value of your investment can go down as well as up.

With a Stocks and Shares LISA, you also need to consider any platform and investment fees that could eat into your returns.

Lifetime ISA rules

Regardless of which type you opt for, there are some common rules which apply to all Lifetime ISAs:

• Only those aged between 18 and 39 can open a LISA, but you can continue paying into your account (and receiving the Government bonus) until you turn 50.
• You can only deposit up to £4,000 in a LISA each tax year – this means the 25% Government bonus is capped at £1,000 per year.
• Any amount deposited in a LISA will count towards your £20,000 annual ISA allowance. However, the Government bonus doesn’t count towards this limit.
• While it’s possible to hold multiple LISAs, you can only open and pay into one of these accounts during a single tax-year.
• Withdrawals from a LISA (other than to buy a first home or over age 60) will incur a 25% charge; this also applies when transferring a LISA to a different type of ISA.

How does the Government’s 25% bonus work?

The Government will pay a 25% bonus on your LISA deposits. This means if you deposit the maximum £4,000 into your LISA per tax-year, the Government will pay an additional £1,000.

You don’t need to apply for the bonus; it will be paid automatically.

The Government bonus is paid into your account four to 10 weeks after making a deposit, depending on the provider. It won’t count towards your ISA allowance but, like the rest of your balance, it will earn interest over time once it’s paid into your account.

Buying your first home with a Lifetime ISA

When using a LISA to buy your first home, there are some key factors to bear in mind:

• You must be a first-time buyer. This means you can’t already own a property anywhere in the world, including buy-to-let or commercial properties or a property you’ve inherited.
• After making your first payment into a LISA, you must wait at least 12 months before using the funds in the account to purchase a property.
• The property you’re looking to buy must be located within the UK, worth less than £450,000 and purchased with a residential mortgage. You must also intend to live in the property, although it may be possible to rent it out at a later date.
• If you and a partner are purchasing a property together, you can both use LISAs and still receive the Government bonus, so long as you are both first-time buyers.
• However, if you hold both a Help to Buy ISA and a LISA, you can only receive the Government bonus from one of these accounts when buying your first home. It’s possible to transfer your Help to Buy ISA to a LISA – read our guide on transferring ISAs.
• To use your LISA for your first property purchase, you will need to contact your LISA provider and give them the details of your solicitor or conveyancer. The provider will transfer the funds directly to your solicitor/conveyancer who will handle the rest.

You can use your full LISA balance towards your property purchase or a portion of it, leaving the rest of the money in your LISA.

Saving for retirement with a Lifetime ISA

Using a LISA to save towards your retirement is relatively straightforward. Once you turn 60, you can make partial or full withdrawals from your account without incurring any fees.

Any money left in your LISA will remain tax-free. Depending on your provider and the type of LISA, these funds may also continue to earn interest or can remain invested in the stock market.

When can you withdraw from a Lifetime ISA?

If you’re using a LISA to buy your first home, it’s important you don’t withdraw the funds in your account, even if you’re ready to make a purchase. This would incur a 25% charge on the amount withdrawn and could result in you losing your tax-free wrapper.

Instead, you’ll need to use a conveyancer or solicitor to act on your behalf, as your LISA provider will pay the funds to them directly.

Once your LISA provider releases your funds, you need to complete your property purchase within 90 days .

Meanwhile, if you’re saving for later life with a LISA, your savings can be partially or wholly withdrawn without incurring any fees once you turn 60. It’s possible to make withdrawals outside of these parameters, but doing so will result in a 25% charge.

What happens if I withdraw my funds for reasons other than buying a first home or retirement?

If you withdraw from your LISA before your 60th birthday (except to buy your first home) or transfer your money to a different type of ISA, a 25% penalty charge will apply.

The only exception to this is if you’re terminally ill. You can withdraw from your LISA without any penalty charge if you have less than 12 months to live.

The penalty charge means you could get back less than you initially deposited, which is why it’s so important to only save into a LISA for its designed purposes.

Tax advantages & drawbacks

As with any other ISA, the interest you earn on a LISA is exempt from income tax. Any returns you make on a stocks and shares LISA will also be protected from Capital Gains Tax.

The Government bonus will be added directly into your LISA and will be exempt from tax.

However, it’s important to remember that you can only deposit a maximum of £4,000 into a LISA each tax-year, limiting the amount of tax-free interest you can earn. To earn more interest on your money without paying tax, you can take advantage of your remaining ISA allowance by depositing it into a standard ISA.

Bear in mind the tax benefits depend on your personal circumstances and may change in the future.

Do I pay tax on the money I withdraw from a Lifetime ISA?

If you use your LISA to purchase your first property, you won’t need to pay tax on the money you withdraw.

If you withdraw from your LISA for any other reason, before or after you turn 60, you won’t automatically need to pay any tax. However, depending on their situation and what they do with the money, some people may need to pay some form of tax.

For example, if you move your money into a standard savings account, you may need to pay tax on the interest earned if the total interest paid on your savings breaches your Personal Savings Allowance (PSA). You can protect your funds from tax by keeping them in an ISA.

Which banks and providers offer Lifetime ISAs?

Our dedicated chart offers a comprehensive overview of LISA products on the market and their providers. You’ll find products from the likes of Moneybox and Paragon Bank, as well as building societies such as Skipton BS and Newcastle BS.

How do I open a Lifetime ISA?

If you’re aged 18 to 39, you can apply for a LISA directly with a provider. Depending on which product and provider you choose, this can either be done online, in branch, over the phone, by post or using a mobile banking app.

As part of this process, you’ll need to supply your personal details, including your National Insurance number; you may also be asked for photo ID or proof of address. Like most savings accounts, you’ll also need to be able to meet the minimum deposit specified by your LISA provider.

Can I open a Lifetime ISA if I already own a property?

You can open a Lifetime ISA if you already own a property, as long as you’re between 18 and 39 years old.

However, you won’t be able to use the money in your LISA towards a property purchase. Instead, you can use the LISA to save for retirement and access the money after you turn 60.

Transferring Lifetime ISAs

It’s possible to transfer in and out of Lifetime ISAs, but there are some ISA transfer rules to be aware of.

You can transfer your existing cash LISA or stocks and shares LISA to a different LISA provider without penalty. It’s possible to transfer your full balance, even if it’s more than £4,000.

If you have money saved in a standard ISA, you can transfer this into a Lifetime ISA and receive the Government bonus. However, you can only transfer a maximum of £4,000 in a single tax-year as this will count towards your annual LISA allowance. If you’re transferring deposits from a previous tax-year into a LISA, this won’t affect your current tax-year’s ISA allowance (but will affect your LISA allowance).

For example, if you have £4,000 in a cash ISA that you deposited in the previous tax-year, you could transfer this to a Lifetime ISA. You won’t be able to add to a LISA for the rest of the tax-year as you’ve maxed out your LISA allowance. However, assuming you haven’t deposited any funds into another ISA in the current tax-year, you still have your full £20,000 ISA allowance available.

If you have a Help-to-Buy ISA, you can transfer up to £4,000 into a LISA each tax-year. Note that you won’t receive the Help-to-Buy ISA bonus if you transfer, but you will receive the LISA bonus.

Although you can transfer a Lifetime ISA to a standard ISA, bear in mind this will incur a 25% penalty charge.

Is paying into a Lifetime ISA smarter than paying into a pension?

Following its introduction, the Government stressed that “the Lifetime ISA is designed to be a complement to pensions saving, not a replacement”. Pensions are a longer-term form of later-life saving which come with their own set of advantages and disadvantages.

Whether it’s smarter to pay into a Lifetime ISA or your pension will depend on your personal circumstances, including your age, your employment status and the level of access you’ll need to your savings. Read our ISA or pension guide to learn more.

Considerations for couples

Many people will be buying their first home with their partner. In this instance, both individuals can use their LISA towards their deposit, as long as they are both first-time buyers. Bear in mind the maximum property price limit of £450,000 applies whether you buy jointly or individually.

If one person is a first-time buyer but the other individual has previously owned a property, the first-time buyer can still use funds from their LISA without penalty. However, if the other buyer has a LISA, they won’t be able to use this towards the property purchase without a penalty charge.