What is a Lifetime ISA?

A Lifetime ISA (also known as a LISA) is a tax-free savings account that can help first-time buyers buy their own home, or can be used to save for retirement. 

If you invest the maximum of £4,000 a year into a Lifetime ISA, the government will then boost that by 25%. Meaning that for every £4 you save, you’ll get a £1 bonus added to your ISA. This bonus will be paid on a monthly basis.

You can have other ISAs running alongside your Lifetime ISA, but only up to the overall UK ISA limit which is currently £20,000 per tax year. (1) So, once you put the annual maximum of £4,000 into your Lifetime ISA, you can also pay up to £16,000 into one or more of the other ISA products.  

Whether you invest in a cash Lifetime ISA or a stocks and shares Lifetime ISA is up to you. Both are eligible for the bonus payments, so it’s just a case of deciding which is best for you.

Am I eligible for a Lifetime ISA?

If you’re aged between 18 and 40 you’re free to open a Lifetime ISA and begin saving for your first home or your retirement. 

Like any ISA, it’s tax-free, but you can only cash it in to be used to buy a first property, and this restriction applies until you’re 60 years old.

If you don’t use your Lifetime ISA to buy a first property, you can withdraw the money once you turn 60 and use it for your retirement, or spend it however you want to. But be aware that if you need to withdraw it before you’re 60, for anything other than a property purchase, you’ll have to pay a 25% penalty fee. (2)

How can I open a Lifetime ISA?

Once you know you’re eligible, simply pick a provider that offers the type of Lifetime ISA you want – either cash or stocks and shares. 

The process of opening a Lifetime ISA is straightforward, and your provider will generally walk you through it. You can set up regular payments into your Lifetime ISA, and also transfer money from existing ISAs if that suits you.

How much can I pay into a Lifetime ISA?

You can pay as much as £4,000 a year into your Lifetime ISA, between the ages of 18 to 50, as long as your payments, combined with payments into any other ISAs you may have, don’t exceed the annual limit of £20,000.

It’s important to remember that you’ll only receive the government bonus on the first £4,000 each year. This means you’d be wise to consider other ISAs if you have money to spare, with fewer restrictions on cashing out.

Is a Lifetime ISA worth it?

It depends on your circumstances, but there is the potential for plenty of ‘free money’ here. If you save £4,000 a year, from 18 to 40, the total value of government contributions would be £22,000. That’s a significant figure you can put towards your house deposit.

You can make contributions up to the age of 50. Therefore, if you pay the maximum amount of £4,000 a year into your Lifetime ISA and decide to cash out at 60, that’s a potential £32,000 of government bonuses to help fund your retirement.

Lifetime ISA providers to consider

As with any investment, different providers will offer different products and different terms and conditions. Some providers offer a good deal on both cash Lifetime ISAs and stocks and shares Lifetime ISAs. Others will specialise in one or the other.

It’s always a good idea to compare Lifetime ISAs on one of the many comparison sites out there. But some of the Lifetime ISA providers you might want to consider include: 

  • AJ Bell

  • Hargreaves Lansdown

  • Nutmeg

  • Forester

  • Moneybox

  • OneFamily

Finding the best Lifetime ISA for you is a matter of looking at what’s on offer, and thinking about what’s best suited to your needs. You’ll want to consider things like how much you’ll save each month, annual fees, and interest rates offered. (3)

Remember to check that any ISA you invest in offers protection for your money, usually through the Financial Services Compensation Scheme (FSCS).

Lifetime ISAs vs Help to Buy

Many potential homeowners consider a Help to Buy ISA, which is similar to the Lifetime ISA in that the government will also contribute bonuses to it, depending on how much you save. 

There are some important differences though...

A Lifetime ISA will generally let you save more money and earn bigger bonuses. You’re not limited by a monthly deposit cap with a Lifetime ISA, as you are with the Help to Buy ISA, and can deposit a lump sum if you obtain one, as long as it doesn’t exceed your overall Lifetime ISA contribution limit of £4,000 for the year.

There are also fewer restrictions on the property you can buy with a Lifetime ISA. With a Help to Buy ISA you can only buy a property worth up to £250,000 (or £450,000 in London). With a Lifetime ISA, you’ll be able to buy a home worth up to £450,000 anywhere in the UK.

You can transfer a Help to Buy ISA to a Lifetime ISA, and with many providers who offer both, this should be a fairly simple process. Just make sure you understand all the changes in conditions this will bring with it, and check that there’s nothing that will trip you up in the future. (4)

What if my Lifetime ISA performs badly?

You may be wondering what happens if a stocks and shares Lifetime ISA performs badly. In terms of the government bonuses, the short answer is: it doesn’t matter. The bonuses are based on what you pay in, not the overall amount in the ISA, so you’ll still get your bonuses on every sum you pay in, up to £4,000 each year.

For the same reason, your interest rate on a cash Lifetime ISA won’t affect your bonuses either. As long as you’re paying in, you’ll still receive your bonuses.

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