A Cash Lifetime Individual Savings Account (LISA) is a government-backed long-term savings account intended to be used to put aside money to buy a home or for retirement.
To be eligible to open a LISA, you must be older than 18 and younger than 40. The chief benefit is that the government gives a 25% bonus on any money saved through the account, up to a maximum of £1,000 each year.
To collect the full bonus, you need to put £4,000 into a LISA in a given tax year, which runs from April 6th to April 5th in the following calendar year. The bonus is paid on contributions made during a given month, at the end of each month.
However, there is a 25% withdrawal charge if you take out money from a LISA before the age of 60 for any reason other than to purchase a home, unless you are terminally ill. The home needs to be worth £450,000 or less and be bought with a mortgage.
You can only pay into a LISA up to the age of 50. Your funds must be kept in the LISA for at least 12 months after your initial deposit, or you will incur the 25% withdrawal charge.
Best Cash Lifetime ISA Rates
Currently, the following UK providers offer Cash LISAs with the highest annual interest rates (AER). Moneybox and Tembo come out on top with rates of 4.8% (for the first year) and 4.8%, respectively.
Bear in mind that rates are variable and can change at short notice. Providers may have specific terms for accepting transfers.
- Tembo — 4.8%
- Moneybox — 4.8% for the first year, then 3.8%
- Bath Building Society — 3.54%
- Paragon Bank — 3.51%
- Nottingham Building Society (formerly Beehive) — 3%
- Skipton Building Society — 2.80%
- Newcastle Building Society — 2.70%
Cash LISAs versus Stocks & Shares LISAs?
A Cash Lifetime ISA specifically facilitates savers putting away cash for the long term and collecting interest on the balance. They are offered as products by a wide range of banks and investment platforms.
This is opposed to a Stocks & Shares LISA, where the money is intended to be invested in the stock market, either by the saver or a third-party investment manager. Cash savings are usually subject to a low risk of losses – depending on the rate of inflation against interest rates, as well as the relative strength of the currency in question – while stocks generally offer the potential for higher returns and a greater risk of losses.
Cash LISAs do not usually carry an annual fee from the provider. This is another difference with Stocks & Shares LISAs, which usually do.
Cash LISAs are also typically covered by the Financial Services Compensation Scheme (FSCS) guarantee on bank deposits up to £85,000, should the provider fail. This should be confirmed on an individual basis, as the guarantee applies to qualifying financial institutions.
It’s important to note that while the returns can ben better with investments made through Stocks & Shares LISAs are not protected should they fall in value or fail. You can read our in-depth analysis of the best investment Lifetime ISAs here.
Can you open a LISA if you already have an ISA?
Yes, you can open multiple Individual Savings Accounts (ISAs) of different types, including LISAs.
It is possible to open more than one LISA, but you can only pay into one LISA each tax year. You can also transfer a LISA to another provider, for example, to take advantage of a better interest rate on cash or lower platform fees.
Other types of ISAs do not provide the same benefits as LISAs, namely the 25% government bonus to savings, or have the same restrictions. The £4,000 annual limit only applies to LISAs.
These ISAs – Cash, Stocks & Shares, and Innovative Finance – allow savers to put away up to £20,000 tax-free each tax year. This allowance is across all such ISAs, so if someone has more than one ISA, then the limit applies to the total saved between all accounts.
Robin has more than six years of experience as a financial journalist, most of which were spent at Citywire, and covers the latest developments in the investing, trading and currency transfer space. Outside of work, he enjoys reading literature and philosophy and playing the piano.
You can contact Robin at robin@goodmoneyguide.com
