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.

Written by
Alex Hasty
Insurance comparison and finance expert
Last Updated
4 APRIL 2023
12 min read
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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 2023/24 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.

How do I open a Lifetime ISA?

If you’ve found a lifetime ISA you like the look of (unfortunately we don’t currently compare lifetime ISAs) then you’ll need to apply directly with the account provider. You can normally do this online, and you’ll just need to fill in a form to provide them with your details. This includes things like your name and date of birth, your address and national insurance number.

Once you’ve set up the account, you’ll need to deposit your first lump sum. You can deposit up to £20,000 each tax year, but remember that this ISA allowance covers any and all ISAs you own, so choose carefully.

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.

Penalties for early withdrawal

If you withdraw from your lifetime ISA, before the age of 60 or not for buying your first home, you’ll be forced to pay a withdrawal charge penalty. The penalty for early withdrawal is 25% of the amount you’re taking out. This is a significant penalty, so you should think very carefully before making an early withdrawal.

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.

Frequently asked questions

How old do you have to be to open a LISA?

To be eligible for a LISA, you must be a UK resident (also includes Crown servants) between the ages of 18 and 40. You can continue making payments into your LISA until the age of 50, but, after this, you won’t be able to save any more or earn the government bonus. However, you will still be able to earn interest or receive your investment dividends.

How does tax work with a LISA?

How tax works with a LISA is quite simple. It doesn’t. You won’t be taxed by HMRC on any of the interest you earn through your lifetime ISA. You also won’t pay income tax on the government bonuses you earn. This makes a LISA a very tax efficient way of saving, either towards buying your first home, or your retirement. To be clear, this also includes dividends tax and capital gains tax, if you’re investing into a stocks and shares LISA.

Can I have a cash ISA as well as my LISA?

Yes, you can open as many ISAs as you like, there’s no limit. However, you just need to remember that you’re limited to the number of ISAs you can deposit into, each tax year. You can only deposit into one ISA, per tax year, which may make having more than one ISA less useful. Although, as we mentioned earlier, if you’re investing more than £85,000 over the long term, spreading your money between multiple ISAs will mean you’re better protected by the Financial Services Compensation Scheme (FSCS).

Can I transfer my LISA?

Yes, if you find another LISA you prefer the look of, you can transfer your money between LISAs. Just make sure you don’t close your account, withdraw the money and then open a new account. This will cause you to be charged a penalty. Instead, you need to tell your provider you’d like to transfer your ISA to a new one. This is very important.

Transferring your LISA could include a like-for-like transfer, but it could also include transfers to and from other types of ISA, such as a standard cash ISA. Remember though, you can only transfer up to £4,000 into a LISA, each tax year. However, ISA transfers don’t contribute towards your annual ISA limit of £20,000. This means you could transfer £4,000 to your LISA from another ISA, but still also deposit up to £20,000 into another ISA account.

Who is considered a first-time buyer?

If you’re planning on using your lifetime ISA to help buy a house, you must be a first-time buyer. A first-time buyer is classified as someone who has never owned a home before, both in the UK and abroad. The home must also be one you plan on living in. It can’t be used to buy a property you plan to rent out to tenants.

How much can my house cost?

You can use your lifetime ISA to buy a house up to the value of £450,000. This is the same, whether you’re buying a house alone, or with a partner. The property must be a residential home that you plan to live in. It can’t be used as a holiday home, or to rent out to tenants.

I am buying a house with my partner, can we both have a LISA?

Yes, if you’re saving up to buy a home with your partner, you can both make the most of a LISA. This allows you to save twice the bonuses and interest, making it easier to save your deposit. However, you must both fit the eligibility criteria for the LISA, which means you both must be first-time buyers, and the home must cost no more than £450,000.

What should I do when I am ready to buy?

When you’re ready to buy your first home, don’t just withdraw the money. This will cause you to be charged the 25% penalty fee. Instead, you need to tell your LISA provider that you’d like them to transfer the money in your account to the solicitor/conveyancer who’s looking after the purchase. If, for any reason, the purchase falls through, the money will be returned to your LISA.

How are my LISA savings protected?

Just like any other account held with a bank or financial organisation that’s regulated by the Financial Conduct Authority (FCA), your money will be protected by the Financial Services Compensation Scheme (FSCS). This scheme is designed to protect your money in the event of an account provider going bust. Under the FSCS, you’ll be able to protect deposits worth up to £85,000. Anything more than this would be lost. So, if you’re investing more than £85,000, you should consider spreading your money between different account providers to protect your money.

Is a LISA better than a pension?

Whether a LISA is better than a pension is up for debate. There are definitely pros and cons to each of them, but a LISA should be viewed more as an alternative to a pension, rather than a replacement. This means you might want to save into both.

If you have a workplace pension which includes contributions from your employer, you might find that the savings on offer there are more valuable. Employer contributions start at 3%, but can be higher, so it’s well worth doing some sums to see if this is better for you. A percentage contribution of a higher salary could be worth much more than the capped government bonuses offered with a lifetime ISA. A personal pension can also be slightly less restrictive, as you must wait until you reach 60, before you can withdraw your money. Otherwise, you’d lose your government bonus and be charged a fee.

On the other hand, being able to access this money at all, before retirement, could actually be a point in a LISAs favour. Also, if you don’t receive pension contributions from your employer, a LISA could be a better option for you.

Your age at this moment could also be a factor in choosing between a LISA and a pension. LISAs are only available if you’re under 40, and only pays its government bonuses until your 50th birthday. If you’re young enough to make this worthwhile, then it can be a great way to save, whereas older workers who are reconsidering their options, may choose to stick with a pension.

Ultimately, the choice is yours. Everybody’s financial situation is unique to them, so it’s up to you to decide which is best for you and your future.

The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.

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