What is a Lifetime ISA?

Written by Lori Campbell on 2nd Feb 2022

What is…? A Good With Money series to help you understand the basics of the different types of investment.

Buying your first home and saving for retirement are two of life’s biggest financial struggles. A Lifetime ISA (or LISA) can help you achieve either of these goals.

You must be aged between 18 and 39 to open a LISA. You can then save up to £4,000 each tax year into it, every year until your 50th birthday. The government will top up your savings by a generous 25 per cent – so for every £4,000 you save, you will get a £1,000 bonus.

If you pay in your full allowance each year between the ages of 18 and 49, you can gain a total bonus of up to £32,000. This makes a LISA an extremely worthwhile way to boost your house deposit or pension pot. However, there are rules around withdrawing your money that you need to know about too.

How does a LISA work?

Like all types of ISA, the LISA is a really tax-efficient way to save money for your future. Any interest you make on your balance is free from tax.

The LISA was launched in 2017 as a way to help people get on the property ladder or save for retirement – so it can only be used for these two purposes.

Like a regular ISA, you can choose a stocks and shares (where your money is invested) or a cash version (where you simply gain interest on your balance). Which one you choose should depend on what you are aiming to use the money for and when you are likely to need it. Generally speaking, a stocks and shares LISA is most suitable if you’re planning to lock your money away for at least five to 10 years.

You can pay into one LISA in each tax year, and the balance will count towards your overall annual ISA limit of £20,000 (the bonus you get isn’t included).

When can I withdraw money from a Lifetime ISA?

To buy a home: Funds can be withdrawn tax-free at any time in order to use as a deposit towards a first home worth up to £450,000. It must be for a home you plan to live in and not rent out or use as a holiday home. Accounts are limited to one per person rather than one per home – this means that two first-time buyers can both receive a bonus when buying together.

For retirement: From age 60, you can withdraw the money tax-free and without penalty for any purpose.

Other withdrawals: You can access your money at any time. However, if you aren’t using the money for a first home or retirement, a 25 per cent charge applies on the amount being withdrawn.

You should be aware that if you make a withdrawal in the first 12 months (so before you get your first bonus), the charge will still be made so you would get back less than you put in. In certain circumstances – for example, a terminal illness or upon death – there will be no charge to close the account.

What if I decide not to buy a home after I open a LISA?

You can carry on saving towards retirement, or withdraw the funds subject to the 25 per cent withdrawal charge mentioned above. If a house sale falls through, the original LISA can be re-opened, and the amount you’d saved replaced.

Is a LISA right for me?

A LISA comes with tight restrictions, so working out if it is suitable for you should be relatively straightforward.

Firstly, you must be aged between 18 and 39 and want help saving for a first home or for retirement. If you require access to your savings for anything other than these two purposes, a LISA will not benefit you. You may even lose money because of the charge made on withdrawals.

The rules are very strict on what constitutes a ‘first time buyer.’ If you inherited a property, didn’t live there and sold it on immediately, that still counts as having owned it. The same is true if you owned a business or had a trust that owned residential property that you could live in.

While some ISAs are flexible (meaning you can withdraw money and pay it back in throughout the tax year without affecting your overall annual ISA allowance), the LISA is not. If you withdraw money, it will still count towards your annual LISA allowance and your overall ISA allowance.

Also, as with all ISAs, a LISA carries an element of risk:

  • Stocks and Shares LISA – you are invested in the stock market so the value of your investments can go down as well as up.
  • Cash LISA – the value of your pot is likely to be eroded if the interest rate isn’t keeping up with the rising value of inflation.

However, LISAs are generally seen as low risk as they are a government product.

Where can I open a Lifetime ISA?

Investment platforms currently offering a LISA include Hargreaves Lansdown, Nutmeg, Moneybox, Skipton Building Society, AJ Bell and Newcastle Building Society.

Top 3 green funds for your ISA or Lifetime ISA

Don't miss the good stuff!

Sign up for the newest and best green money deals in your inbox every week