Lifetime ISA FAQ
What is a Lifetime ISA?
Lifetime ISAs (LISAs) are their own type of ISA, separate from the existing Cash (including Help-To-Buy (HTB)), Stocks and Shares (S&S), and Innovative Finance (IF) ISAs.
They are a combined savings product both for First Time Buyers to save their deposit and for anybody to save for retirement.
LISAs can be either cash (getting paid interest by a bank or building society) or S&S where you aim to make returns on your chosen investments.
As they are a separate type of ISA, you can pay in to a LISA in addition to any of the other types of ISA in the same tax year, but they come within the overall annual contribution limit of £20,000.
Who can open one?
Anyone aged 18 and 39 (the cut off is the day before your 40th birthday) who is resident in the UK.
You cannot pay in to a LISA once you turn 50 (again the cut off is the day before your 50th birthday).
What are the advantages of LISAs?
Like all ISAs the money within it is sheltered from income and capital gains tax.
You can only save up to £4,000 per year into a LISA and the government will give you a 25% bonus on any contributions (add £2,000, get £500; add the full £4,000 get an extra £1,000). The bonus for contributions are paid a month after your contributions.
You can open a Cash LISA or a Stocks & Shares LISA, depending on the timescale.
When buying a house as a FTB, you can use the full amount plus bonus on any property worth less than £450,000. Your conveyancer will need to arrange the use of it to ensure you get the bonus, do not withdraw the funds yourself!
If holding for retirement purposes, you can withdraw the funds completely penalty-free from the age of 60.
Savings for retirement within a LISA should be invested in stocks and shares, just like your pension is, in order that they can grow to support you in retirement. For ideas about where to invest these, see other posts in the sub. Cash savings currently struggle to keep up with inflation and almost certainly won’t grow enough to keep you flush in retirement.
What are the drawbacks?
Your LISA needs to be open for a year before you can use the money. The money cannot be used for a house worth more than £450,000, and you’re not meant to let out a house that was bought using a LISA.
If used to save for retirement, the money cannot be accessed before aged 60 except by paying a penalty of 25% of the total amount (which works out as all of the bonus you received then 6% of the money you contributed too).
The only exceptions to this penalty are if you change your mind during the first month before any bonus has been paid, or if you become terminally ill before aged 60; in either case you can then withdraw the money from your LISA without penalty.
Note: As a result of the COVID-19 pandemic, until April 2021 any money taken out of the LISA prematurely will only be subject to a 20% penalty, which equates to just the Government bonus and any growth on that portion being removed.
Furthermore you cannot pay in to a LISA once you reach aged 50, though the money will continue to grow within the account until you use it to buy a house (if still a FTB then!) or for retirement from aged 60.
Money within a LISA counts as savings/assets for means testing for benefits and care costs.
Money held within a LISA is assessed as the holder’s estate if they die, which usually leads to worse outcomes than pension holdings.
Who is offering LISAs?
For Cash ISAs, Money Saving Expert maintain a Best Buys list here
A few brokers are offering S&S LISAs: Hargreaves Lansdown, Nutmeg, The Share Centre, and AJ Bell are all examples.
Can I transfer my LISA between providers?
How do HTB ISAs and LISAs interact?
You are only able to claim the bonus on one or the other in any given tax-year.
As HTB ISAs are no longer available, this has become somewhat of a legacy issue.
Buying your first house with a LISA
You must be a first time buyer (as per the Help-To-Buy eligibility rules). The house cannot be worth more than £450,000 and must be in the UK. You tell your LISA provider your conveyancer’s details, your conveyancer confirms to your LISA manager that both you and the conveyancer are eligible to withdraw the money without penalty.
Any and all first time buyer involved in the purchase may use their LISA if they and the purchase are eligible. So if you and your partner are both first time buyers and are buying together, then you can both use LISAs (double bonus!), and equally if only one of you is a first time buyer, that person can still put money from their LISA towards the purchase.
How do LISAs compare to pensions?
This is complicated. In most cases pensions are better value and should be the first place you save for retirement, but in a few specific situations a LISA is worthwhile.
Only once you have exhausted tax relief, maxed out employer and/or reached the annual allowance for pension contributions does a LISA potentially become better than a pension, but with additional drawbacks in disaster scenarios.
A full comparison can be found at: ISA vs LISA vs pension