The Lifetime ISA was introduced in 2017 as a way to encourage people to save for their first home, and/or retirement. With a generous government bonus added to your contributions, this is a savings account worth considering as an extra string to your long-term savings bow.

With a lifetime ISA, you can hold cash or invest in stocks and shares wrapped in an ISA, depending upon your preference, experience and attitude to risk.

How does a Lifetime ISA work?

The Lifetime ISA (LISA) replaced the Help to Buy ISA, which is now closed to new applicants. The LISA lets you save up to £4,000 a year to earn a government bonus of 25% of your contributions, and you can also earn interest as with other cash savings accounts. The £4,000 counts towards your £20,000 annual ISA allowance. You can only use the LISA for two purposes: to buy your first home worth less than £450,000, or for retirement. You can’t withdraw the money unless you are buying a house, you reach the age of 60, or you are terminally ill. If you withdraw early or for any other reason, it will cost you a penalty of 25% of the full value your savings pot, so you lose the bonus and some of your original capital too. You can choose a Stocks & Shares or a Cash version of the LISA. You must be aged 18-39 to open one, and you can pay into it and get the bonus until age 50.

Pros and cons of a Lifetime ISA

Because it is an Individual Savings Account (ISA) you don’t pay tax on any interest or investment returns your LISA makes, so withdrawals will be tax-free.
While the LISA is designed for long-term savings, for most people they should not replace a workplace pension where an employer pays in too. But self-employed people might find them useful as a retirement savings product to sit alongside a Self-Invested Personal Pension (SIPP).

  • You can choose to invest in stocks or save in cash, or a combination of both.
  • You can pay in a lump sum or drip feed money in gradually.
  • The bonus is paid monthly, so it’s in your account for longer to earn more interest.
  • If you saved the maximum amount from the age of 18 to 50, you could earn up to £32,000 in bonuses.
  • You can transfer to another provider if you see a better rate on offer.
  • If you are buying a house alongside another first-time buyer, you can each have your own LISA.
  • Your cash savings are protected up to £85,000 under the Financial Services Compensation Scheme in case your regulated LISA provider collapses.
  • The cons are that you can save much less into a LISA than you can into a pension.
  • You can’t withdraw money from a LISA without paying a penalty before the age of 60, or to buy your first home.
  • The account must have been open for a year before you can use it to buy a house, and there are other conditions attached.
  • Having a LISA could affect your entitlement to claim benefits.

Where are the best Lifetime ISA deals?

  • The Moneybox Cash Lifetime ISA pays 1.25% AER variable and can be opened with just £1. It can be managed through an app. Currently it is not accepting ISA transfers by post because the Moneybox team is working remotely.
  • Nottingham Building Society’s Lifetime ISA pays 1.25% AER variable. You can open an account online with just £10.
  • Paragon Bank’s Lifetime ISA pays 1.15% AER variable. You can open and manage the account online with a £1 opening balance.

About The Author