Lifetime ISAs Explained
There are only two things you can use the money in your Lifetime ISA for:
- Buying your first home: If you’re a first-time buyer you can use all or some of the money in your account towards the deposit you need to buy a home in the UK worth £450,000 or less.
- Retirement: To help fund your retirement, once you turn 60 you can take all or some of the money out of your account tax free and use it for whatever you like.
If you take money out of a LISA for another reason, you’ll have to pay a penalty and will lose that part of your ISA allowance for the year. This does not apply if you transfer a Lifetime ISA to another provider.
- Want to see the best Lifetime ISA accounts? Compare Lifetime ISAs here.
How does a Lifetime ISA work?
As with other types of ISA, it lets you earn interest or investment growth tax free.
You can pay up to £4,000 into a Lifetime ISA each tax year as part of your overall ISA limit (£20,000 in the 2021-22 tax year) and can invest in either cash or stocks and shares. The government then gives you a tax-free 25% bonus on the total amount you pay in.
So if you pay in the full £4,000 you’ll get £1,000 from the government, taking your total savings for the year up to £5,000. You’ll then earn interest or get investment growth on the whole amount.
The bonus is automatically added to your account each month based on the amount you’ve paid in by the provider you have your Lifetime ISA with. If you take any money out before you get the bonus, it will still be paid to you as if the money was still in there.
Most Lifetime ISAs let you transfer your existing ISAs, including a Help to Buy ISA if you have one, into them but the money will count towards your annual £4,000 LISA limit. It won’t affect your £20,000 overall ISA limit for that tax year though.
You’re allowed to pay in up to £4,000 a year until the day before you turn 50, so you could pay in up to £128,000 if you take one out when you turn 18 and pay in the maximum each year. You’d end up with a total bonus of £32,000.
Withdrawing money from a Lifetime ISA
There are three situations in which you can withdraw money from it for free –
- Property: you’re buying your first home (as long as you’ve had the account for at least 12 months)
- Age: you’re over 60
- Health: you’re terminally ill with less than a year to live.
So if you’re not a first-time buyer and don’t use the money to buy your first home you’ll have to wait until you’re over 60 to withdraw it without charge.
If you take money out for any other reason – known as an unauthorised withdrawal – you have to pay a charge of 25% of it, which is more than the government bonus you received.
For example, if you paid in £4,000 and received a bonus of £1,000 you would then have £5,000 before any interest or investment growth. But if you then withdrew £5,000 you would pay a charge of £1,250 and would get back just £3,750 of the £4,000 you paid in, so you should avoid making unauthorised withdrawals if you can.
If you need a specific amount you should take the charge into account to make sure you withdraw enough.
Stocks and shares LISAs
A stocks and shares Lifetime ISA lets you invest in stocks and shares to grow your money rather than getting interest from your provider. You may be able to earn more than with a cash LISA but there’s also a risk that you could lose money so you should only take one out if you are willing to take that risk.
Some providers let you decide what to invest in yourself, such as AJ Bell and Hargreaves Lansdown. Alternatively, if you’re less confident about making your own investment decisions, you can choose a LISA where the investing is done for you. Some have ready-made portfolios for you to pick from, such as Nutmeg and Moneybox, while others invest your money in one specific fund, such as Foresters Friendly Society.
Ultimately, how well your LISA [fca] does depends on what your money is invested in but there are also management fees to pay so you should look carefully at these before choosing a provider as they can eat into your investment returns.
Lifetime ISA investment options
As with a regular stocks and shares ISA, you can invest in a range of options, including individual shares, funds, investment trusts and government bonds, although the degree of choice you have depends on which provider you go with.
Managed investment Lifetime ISAs
If you don’t feel confident making investment decisions yourself, you can choose a provider that manages your investments for you.
Nutmeg lets you choose from ready-made portfolios based on your attitude to risk. For example, you can choose from cautious, balanced and adventurous. The more risk you are prepared to take the higher the potential returns but also the higher the potential losses.
If you are confident in making your own investment decisions Hagreaves Lansdown are AJ Bell are two of the biggest investment platforms in the UK where you can buy shares, bonds ETFs, and funds for a Lifetime ISA.
DIY (do-it-yourself) LISAs
DIY Lifetime ISAs – where you choose where to invest your money yourself – are best suited to more experienced investors. The providers to choose from are AJ Bell and Hargreaves Lansdown. Both accept transfers in from other ISAs (up to the annual limit of £4,000). Make sure you look at the fees you’ll have to pay when deciding which is best for you.
As you can only invest £4,000 a year into a stocks and shares Lifetime ISA, if you want to use the rest of your annual ISA allowance of £16,000 you’ll need to pay it into a regular stocks and shares ISA, which you could do with the same provider, or a cash ISA. You can only open one of each type of ISA and pay into one of each type every tax year.
If you want to invest more than £20,000 in a year outside of a pension you can put your money into a general investment account, although you’ll pay tax on any money you make.
Lifetime ISA charges
The main charges you’ll pay are an annual platform charge for holding investments in your account and charges for each deal you make. The provider that is cheapest for you will depend on a range of factors including how often you plan to buy or sell investments.
For example, AJ Bell has a platform charge of 0.25% of the value of your investments. Charges for online deals range from £1.50 for funds to £9.95 for shares (£4.95 if you made more than 10 in the previous month).
Hargreaves Lansdown, on the other hand, has a platform charge of 0.45% but no dealing charges for funds. Its share dealing charges range from £5.95 per deal if you make 20 or more in a month rising to £11.95 for up to nine.
The investments themselves may also have their own charges.
Buying a house with a Lifetime ISA
To qualify as a first-time buyer for the purposes of a Lifetime ISA you must have never owned a home anywhere in the world. You must also have had a LISA for 12 months or more before you can use the money in it to buy a home or you will have to pay the 25% withdrawal charge.
The property you buy must be one you plan to live in (not a buy-to-let) and that you’ll be buying with a mortgage. You can also use your Lifetime ISA to buy a home through a government scheme such as shared ownership or the mortgage guarantee scheme, or to buy land to build your own home.
You need to use a solicitor or conveyancer when you buy your home as the provider of your Lifetime ISA will send the money directly to them to use as all or part of the deposit you need to exchange contracts with the seller – usually 10%. They can also put it towards any extra you need for your mortgage deposit if there’s money left.
For example, if you’re buying a £200,000 home with a 75% mortgage, you’ll borrow £150,000 from your mortgage lender and will need to pay £50,000 towards the purchase price yourself.
If you have £30,000 in your Lifetime ISA, £20,000 can be used for the exchange deposit and the rest can be put towards the remaining £30,000 you need to pay the rest on completion.
Once your solicitor or conveyancer receives the money your property purchase must complete within 90 days although they can ask HMRC for an extension.
If you’re buying with someone else, such as your partner, and they also have a Lifetime ISA you can both use the money in your accounts to buy a home together but they must also be a first-time buyer and the property still has to be worth £450,000 or less.
The money will have to be returned to your Lifetime ISA if your purchase falls through.
Lifetime ISAs for retirement
To use your Lifetime ISA for your retirement you simply withdraw some or all of the money, which you can do from your 60th birthday, and use it however you like.
If you’re an employee, saving into your workplace pension rather than a stocks and shares LISA for retirement is likely to be a better option as your employer must pay money into it as well. Plus, you get 40% tax relief on your pension contributions (41% in Scotland) if you’re a higher-rate tax payer, which easily beats the bonus you get from a LISA.
The money in a LISA is also taken into account for mean-tested benefits and is treated as an asset in bankruptcy while a pension usually isn’t.
The advantages of a LISA for retirement are that you can withdraw the full amount tax free when you hit 60 but only 25% of your pension and you can take your money out early if you are prepared to pay the withdrawal charge. You can’t currently take money out of a pension until you’re at least 55.
Saving for your retirement should be done over the long term so, if you do choose to save into a LISA, a stocks and shares LISA is likely to be a better option than a cash one.
Richard is the founder of the Good Money Guide (formerly Good Broker Guide), one of the original investment comparison sites established in 2015. With a career spanning two decades as a broker, he brings extensive expertise and knowledge to the financial landscape.
Having worked as a broker at Investors Intelligence and a multi-asset derivatives broker at MF Global (Man Financial), Richard has acquired substantial experience in the industry. His career began as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson), following internships on the NYMEX oil trading floor in New York and London IPE in 2001 and 2000.
Richard’s contributions and expertise have been recognized by respected publications such as BusinessInsider, Yahoo Finance, BusinessNews.org.uk, Master Investor, Wealth Briefing, iNews, and The FT, among many others.
Under Richard’s leadership, the Good Money Guide has evolved into a valuable destination for comprehensive information and expert guidance, specialising in trading, investment, and currency exchange. His commitment to delivering high-quality insights has solidified the Good Money Guide’s standing as a well-respected resource for both customers and industry colleagues.
