What is a Lifetime ISA? - Times Money Mentor (2024)

A Lifetime ISA (LISA) could help you reach long-term financial goals from buying a house to saving for retirement.

Lifetime ISAs let you save up to £4,000 each tax year and the government will give you a 25% bonus on top. This gives you a bonus of £1,000 every tax year. But there are a number of restrictions and things to consider first.

In this article we explain:

• What is a Lifetime ISA and how does it work?
• Who is eligible to open a Lifetime ISA?
• The difference between a LISA and a stocks and shares ISA
• How do I use a Lifetime ISA to buy a house?
• How do I use a Lifetime ISA to save for retirement?
• What is the Lifetime ISA penalty and how does it work?

If you already know how a LISA works, you can go straight to our best Lifetime ISAs article.

How does a Lifetime ISA work?

The Lifetime ISA was introduced in 2017 to help first time buyers get on the property ladder or save for a pension.

Like all ISAs, the Lifetime ISA (LISA) is a really tax-efficient way to save money for the future because any interest, dividends and profits you make are free from tax.

However, with a LISA, you also get a 25% government bonus worth up to £1000 every tax year depending on your level of contribution.

LISAs can only be used for:

• The exchange deposit on your first home worth no more that £450,000
• Funding for your retirement

Money can only be withdrawn from your LISA for these reasons or you will lose the bonus and face a 5% government withdrawal charge.

You can open a stocks and shares ISA or a cash version. Which you choose, depends on what you are wanting to use your LISA for and when you are likely to need that money. We explain more on this later in this article.

Unlike other ISAs, you can only contribute up to £4,000 each tax year, leaving you with £16,000 to spread among your other different ISAs. For more about the rules surrounding ISAs and how much you can contribute, check out our article: Guide to ISAs: which ISA should I get?

How much is the Lifetime ISA bonus?

On top of any interest earned or investment gains from your LISA, the government will pay a 25% bonus up to a maximum of £1,000 a year. You need to contribute the maximum allowed amount of £4,000 each tax year to get the full bonus.

If you can only afford to you pay £2,000 into your LISA in a tax year for example, you will receive a £500 government top up.

This bonus is paid up until your 50th birthday or until you use the money to buy a property.

If you opened a LISA on your 18th birthday and paid the maximum contribution each year up until you are 50, the maximum bonus you can receive is £33,000.

Some Lifetime ISA providers treat bonus payments differently, by either:

• Automatically reinvesting it to maximise growth potential
• Putting it in a non-interest earning cash account

Check before you take out a LISA as it could affect the total amount of your pot at the end.

Read more: Should I get a pension or a lifetime ISA?

Who is eligible to open a Lifetime ISA?

In order to open a Lifetime ISA, you must:

• Be over 18 and under 40 years of age
• Have never owned a home before, in the UK or anywhere in the world
• Be a UK resident or a Crown servant (such as a member of the armed forces serving abroad)

The rules are 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.

Restrictions when using a LISA to buy a home

You can withdraw the money in order to buy a house without facing the charge provided you:

• Put the funds towards the exchange deposit for your first home
• You must not have owned another property in the UK or anywhere in the world
• The property is to live in and not used to rent it out
• You must pay using a mortgage and not cash
• You have been contributing towards your LISA for a minimum of 12 months
• The purchase must be completed within 90 days of your conveyancer receiving the withdrawn funds from your LISA manager

Remember: the Lifetime ISA house price limit is £450,000.

If you are buying a home with another person who also has a LifetimeISA, they can use their savings and government bonus alongside yours.

A Lifetime ISA is just one way to help you get on the property ladder. Find out more about buying your first home.

Restrictions when using a LISA for retirement

You can withdraw the money in the Lifetime ISA in order to fund your retirement without facing the charge provided you:

• You are over 60

You can also withdraw funds from your LISA without incurring a charge if you are terminally ill, with less than 12 months to live.

What is the difference between a regular ISA and a Lifetime ISA?

Apart from what you can use the LISA money for, there are a number of other differences between a lifetime ISA and regular ISA. This includes:

How much money you can contribute each tax year

• LISA: You can save up to £4,000 in the current tax year
• Regular ISA: The limit is £20,000 with a regular cash or stocks and shares ISA

Remember that the money you save into your Lifetime ISA counts towards your annual ISA allowance of £20,000. In other words, if you max out your LISA, this leaves you with £16,000 to spread across other ISAs you hold.

The bonus

• LISA: A 25% government bonus is added to whatever you manage to save, up to a maximum £1,000 in a tax year
• ISAs: Regular ISAs don’t come with a bonus

The age restrictions

• LISA: you must be over 18 and under 40 years of age to open a LISA. You can’t continue to pay into your LISA or receive the bonus after the age of 50, and withdraw the money at 60 (if using for retirement)
• ISA: 16+ for a cash ISA and 18+ for a stocks and shares or innovative finance ISA. There is a junior ISA equivalent if you want to open one for a child. You can continue to pay in at any age and typically withdraw money whenever you like, unless you are tied in to a fixed deal.

The reasons to withdraw

• LISA: you have to use the money to either buy your first home or for your pension
• ISA: you can withdraw the money to use how you want

Can I have a Lifetime ISA and a stocks and shares ISA?

Yes, you can have both.

You can pay into one of each type of ISA available, as long as you don’t exceed the £4,000 lifetime ISA allowance and maximum overall £20,000 ISA allowance.

You also must not pay into two of the same type of ISA in a tax year. For example, you can’t pay into two cash ISAs in the same tax year.

Here’s an example of how you might choose to split your ISA allowance in a tax year:

• Put the maximum £4,000 into a lifetime ISA
• Contribute £11,000 into a stocks and shares ISA
• And use your remaining ISA allowance of £5,000 in a cash ISA

Want to know more about ISAs? Watch our ISA video below

Which LISA you choose depends on:

• How you intend to use your LISA
• Your timeframe

Buying a property in the next few years? It may be worth getting a cash LISA because any short-term losses will be locked in if you need to access your money when the market is down.

If you are not planning to buy in the next five years then a stocks and shares LISA may be more sensible. Even if you open a lifetime ISA at 39, that leaves 21 years for your money to grow.

We look at whether to invest in a stocks and shares ISA or go for a cash ISA?

Check out our easy-to-follow investing for beginners guide to help you get started and feel more confident.

How do I open a Lifetime ISA?

While anyone can give you money to put into your LISA, only you can open one. You can do so with a bank, building society or investment manager that offers the product.

Once you have decided whether you want to open a cash or a stocks and shares Lifetime ISA, you need to shop around for the best provider.

For more help on which ISA to choose see our pick of best ready-made stocks and shares LISAs.

You need to apply directly to the provider to open the account. This is usually more straightforward online. They will ask you for your personal details to check that you are eligible for the account:

• Your name and date of birth
• National Insurance number
• Verification of your address and identity

You can hold more than one LISA, although you can only pay into one and receive the bonus in each tax year.

You must make your first payment into your Lifetime ISA before you’re 40.

Can I transfer to another provider?

Yes, you can transfer to another Lifetime ISA provider without incurring a 25% withdrawal fee or affecting your overall ISA limit for that tax year.

There is no limit on the amount that you transfer but you must transfer any current year payments in full to your new Lifetime ISA provider. They may require that you are under 40 to transfer.

A LISA transfer:

• must be made within 30 days from when the transfer request is made
• can have any outstanding bonus claimed by the receiving LISA manager
• must have all relevant account information provided to the receiving Lifetime ISA manager

Transferring to a regular ISA will be viewed as a withdrawal and subject to the 25% charge unless you are over 60 or terminally ill.

If you are looking for an ISA, check out our independent ratings for best cash ISAs and best ready-made stocks & shares ISAs.

Can I lose money with a Lifetime ISA?

All ISAs carry an element of risk and a LISA is no different. Risk also relate to the type of LISA you choose:

• Stocks and shares LISA: you are invested in the stock market so the value of your investments can go up as well as down
• 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

How do I use a LISA to buy a house?

If you are using your Lifetime ISA money to buy a home, there are rules that you need to follow:

• You must be a first-time buyer
• The Lifetime ISA house price limit is £450,000, meaning you cannot purchase a property using your LISA funds for a home worth more than this
• It must be a home that you plan to live in, not a rental or holiday home
• You need to take out a traditional repayment mortgage and not be a cash buyer
• You must have made your first payment into your LISA 12 months before you can it to buy a house
• It is possible to use the LISA alongside other schemes such as:
  • Help to Buy loans
  • Shared ownership
  • Right to Buy
• Lifetime ISAs can be combined together if you are buying a home with someone else
• If only one of you meets the eligibility criteria, then only that person can use a Lifetime ISA

The rules around how you can use your Lifetime ISA to buy a house are also quite specific:

• Money in the account, including the bonus, is transferred from the provider to your conveyancer or solicitor and not directly to you
• You must request this from your Lifetime ISA provider
• The property purchase needs to be made within 90 days of the money leaving your account
• If the sale falls through, all your money will go back into your LISA. You won’t lose any money and it won’t affect the £4,000 allowance

NOTE: it is possible to ask your solicitor to write to HMRC in order to get an extension if the process is likely to take longer than 90 days.

What is a Help to Buy ISA?

Help to Buy ISAs were the precursor to the LISA and stopped being available to new savers after 30 November 2019.

If you already hold one, you can keep saving into it until 30 November 2029 and claim your bonus by 1 December 2030.

These are the help to buy ISA rules:

• You save up to £200 a month towards your first home
• The government adds a 25% bonus on what you saved, up to £3,000
• You only get the bonus if you use the money as a deposit for your first home worth up to £250,000 outside London and £450,000 in London

Remember this is different to Lifetime ISAs which can be used to buy homes worth up to £450,000, wherever you buy in the country.

What’s the difference between a Help to Buy and Lifetime ISA?

The Lifetime ISA was launched in 2017 to replace the Help to Buy ISA and both offer a 25% government bonus on your savings.

However, there are lots of differences between these two products.

For example, if you are buying a house outside of London:

• The Help to Buy ISA maximum house price is £250,000
• Compare that to the Lifetime ISA which has a maximum purchase price of £450,000

The table below outlines the differences between the two products.

Can you have a Help to Buy ISA and a Lifetime ISA?

Yes, you can hold both a Help to Buy ISA and a LISA but you can only get the bonus using one when buying a house.

However, you could use the Help to Buy ISA bonus to buy a home and then use the LISA bonus to save for retirement.

You might also be able to transfer your Help to Buy ISA into your LISA if your provider allows it. Definitely check beforehand.

Lifetime ISA for retirement: How can I benefit?

The Lifetime ISA can also be used as a way to save for your retirement. You can hold one on its own or alongside a pension.

You can’t continue to save into your Lifetime ISA after your 50th birthday, after which time your bonus payments will also stop. However, you can’t access your money without a penalty until you are 60.

After that time you can make full or partial withdrawals from your Lifetime ISA, without paying tax or a fee and can spend it how you choose.

Read more about how Times Money Mentor reader Alan discovered that it’s never too late to start saving for his retirement.

What happens to my Lifetime ISA savings when I die?

Any Lifetime ISA savings, including interest and bonuses, will pass on to your beneficiaries if you die. Or the money will pass on automatically to your spouse or civil partner if you don’t have a will.

Your loved ones will not face a withdrawal penalty, although the tax-free ISA wrapper will be lost and the value forms part of the estate for inheritance tax purposes.

If you are looking for an online will writing service, check out our independently rated top providers here.

How will opening a LISA affect my other ISAs?

Each tax year you can open one of each of these types of ISA:

• Cash ISA
• Stocks and shares ISA
• Lifetime ISA
• And an Innovative Finance ISA.

The government sets out how much you can save into your ISAs while still retaining the tax free advantages.

NOTE: The ISA allowance is currently £20,000. The maximum you can save into a LISA each tax year is £4,000, leaving you £16,000 to spread across your other ISAs

You can put all of your allowance into one type of ISA or you can split it between a number, provided you don’t pay into more than one type of the same ISA.

Bear in mind you can have more than one cash ISA, but you can only pay into one of those cash ISAs each tax year. So you have to choose your favourite one to contribute into.

How does the Lifetime ISA withdrawal penalty work?

Watch out when withdrawing money from Lifetime ISA.

If for reasons other than buying a home, retirement or terminal illness, you will be charged 25% of the amount you withdraw. The government effectively deducts the government bonus (which is 20% of your Lifetime ISA savings) and hits you with a 5% penalty on top.

For example:

• If you had managed to save £2,000 in your LISA and received a £500 government bonus this would give you giving you £2,500 in total
• But if you decided to withdraw money and were hit with the penalty, you would lose 25% of £2,500, which is £625
• This would leave you with £1,875, a total of £125 less than what you had originally saved

You do have a 30 day cooling off period during which time you can close your account without being charged.

Warning: if you have not had your LISA opened for more than 12 months, you don’t get the bonus.

Is it worth opening a Lifetime ISA?

Whether a Lifetime ISA is worth taking out depends on you:

• What your financial goals are
• Your age
• The amount you want to put away each year
• How much you earn
• Your appetite to risk

If you are a first time buyer who wants to get on the property ladder, the £1000 government top-up is incredibly attractive. The money you contribute is tax-free and so is the interest and investment returns made on your money.

You can always open your LISA alongside another savings account, such as a cash ISA if you plan to put away more than £4,000 a year. Discover the best savings accounts paying the highest rates here.

Where the decision to open a LISA becomes a little more complex is for those considering using it for retirement savings. You can’t add anymore money or get the bonus from the age of 50 and yet you will have to wait to access the money before you are 60.

Higher rate tax payers, who get 40% tax relief on their pension, are a group that may be better off opting for a pension. Check out our article: should I get a pension or a Lifetime ISA?