Lifetime ISAs

Lifetime ISAs are a way for you to get on the property ladder or build up a nest egg for your retirement. Here’s everything you need to know about how a lifetime account works, what the limits are and whether it’s right for you.

Lifetime ISAs are a way for you to get on the property ladder or build up a nest egg for your retirement. Here’s everything you need to know about how a lifetime account works, what the limits are and whether it’s right for you.

Anelda Knoesen
From the Money team
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Posted 7 JANUARY 2021

What is a Lifetime ISA?

A Lifetime ISA, also known as a LISA, is a type of tax-free savings or investment account. It’s designed to help young people under the age of 40 save up for either a deposit on their first home or a comfortable retirement in their golden years.

If you save money into a LISA, the government will also give you a contribution. In fact, there’s up to £1,000 of free cash available a year just for saving.

You can have a cash Lifetime ISA or a stocks and shares Lifetime ISA. You’re allowed to have more than one Lifetime ISA, but you can only pay into one in each tax year. 

How does a Lifetime ISA work?

Lifetime ISAs aren’t open to everyone, and there are certain rules that apply. Here’s a summary of the main ones:

  • To set up a Lifetime ISA, you’ll need to be aged 18 or over but under 40 on the day you open the account.
  • You can pay up to £4,000 a year into a LISA account. The government will then add a 25% bonus on top of anything you add, up to a maximum of £1,000 in each tax year. Plus, you’ll earn tax-free interest on your savings.
  • You can continue to pay into a Lifetime ISA until you’re 50 and get the 25% bonus each year. If you’re saving the money for your retirement, you’ll have to wait until you’re 60 to access your cash.
  • You normally pay a 25% penalty if you withdraw the cash and don’t use it to buy your first home or you’re under 60. However, the penalty has been cut to 20% until 5 April 2021 to help those who need to access their savings early because of the coronavirus pandemic.
  • The Lifetime ISA limit of £4,000 counts towards your annual ISA limit. This is £20,000 in the 2020-21 tax year. You’re allowed to split your ISA limit between a LISA and a cash ISA, stocks and shares ISA and an innovative finance ISA.

Did you know?

If you were to save the maximum £4,000 a year from the age of 18 to 50, you’d receive £32,000 in government bonuses in total. That’s assuming the laws don’t change in the meantime, of course.

Using a Lifetime ISA for buying a house

If you want to use a Lifetime ISA to buy your first home, you’ll need to find a property that costs less than £450,000. You’ll also need to get a traditional repayment mortgage.

Only first-time buyers can use a Lifetime ISA for a home. If you’ve ever owned a home before (anywhere in the world), you can’t use a LISA to buy a property.

You must live in the home you’re buying. You won’t be able to rent it out or use it as a holiday home.

If you’re planning to buy a home with your partner, you can both open a Lifetime ISA and benefit from the government bonuses if you’re eligible. This can help you meet your deposit target faster.

Using a Lifetime ISA for retirement

If you don’t use your Lifetime ISA to buy your first home, you’ll have to leave the money in your account until you turn 60 – unless you’re happy to pay a fee to withdraw it. You’ll no longer receive the bonus after your 50th birthday.

Once you reach 60, you can use the money for whatever you like, and you don’t have to take it out all at once. Money left in the account will continue to earn interest or grow/shrink in line with your stock market investments.

A Lifetime ISA shouldn’t be seen as a substitute for paying into pension. If your employer matches pension contributions, your workplace pension scheme is likely to be a more lucrative option for your retirement.

As with any savings account, the terms of the LISA could change before you turn 60.

Lifetime ISA vs Help to Buy ISA

Like many savers, you may be wondering if a Lifetime ISA is better than a Help to Buy ISA, as both schemes are designed to help first-time buyers. Well, to start with, we should point out that Help to Buy ISAs are no longer available to new customers.

  • If you already have a Help to Buy ISA and are considering switching, here are a few things to think about:
  • You can continue to save with your Help to Buy ISA until November 2029. Like with a Lifetime ISA, you get a 25% bonus, but the maximum you can receive is £3,000.
  • The main difference between a LISA and Help to Buy is that you can save £4,000 a year in a LISA, compared with £2,400 (£3,400 in year one) in a Help to Buy ISA. This could mean your money grows faster with a LISA.
  • The Help to Buy ISA only pays the bonus after the sale of the property you’re buying is completed. It can't be used towards your initial deposit on the property, whereas the LISA can.
  • If you don’t use the money in a Help to Buy ISA to buy a house, you can withdraw it without paying a penalty, although you won’t get the bonus.
  • You can open a Lifetime ISA alongside a Help to Buy ISA but only claim the bonus from one account, or you can transfer the money in your Help to Buy ISA into a Lifetime ISA.

Who offers Lifetime ISAs?

You can open a LISA with any bank, building society or investment management company that offers it. However, there are only a handful of Lifetime ISA providers in the UK.

To get the best Lifetime ISA for your needs, it’s worth comparing providers so you can make an informed decision. At Compare the Market, we currently only compare cash Lifetime ISAs. Providers include:

  • Skipton Building Society
  • Nottingham Building Society
  • Newcastle Building Society
  • Paragon Bank

Once you’ve opened a LISA, you don’t have to stick with same the provider. It makes sense to do regular Lifetime ISA comparisons to see if you can get a better interest rate elsewhere.

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