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A Lifetime ISA (LISA) is a tax-efficient way to save money for your first home or for retirement. A LISA can be opened by anyone aged between 18 and 39 and you can use it to save up to £4,000 annually. The benefit is that the government will add a bonus - an extra 25%, up to £1000, depending on your contributions.
Guide to Lifetime ISAs
5 min read
Lifetime ISAs might be a good option if you're looking to save and invest to buy your first home. Find out more below.
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Abigail BoltonSEO Specialist and Senior Copywriter
Published January 23rd 2024
Updated on December 24th 2024
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- Home
- For buyers
- What can you afford
- Guide to Lifetime ISAs
What is a Lifetime ISA?
Looking for a tax-free way to save and invest for your first home or later in life? Lifetime ISAs (LISAs) might be a good option, as the government will reward you with a big annual bonus. Find out more on rules, eligibility, and factors you need to consider before opening your account.
On this page:
How do Lifetime ISAs work?
Here are a few rules and restrictions you need to consider:
You can open one at any time between the ages of 18 and 39
You can open more than one LISA, but you can only pay into one in each tax year
Each tax year you can invest up to £4,000, until you’re 50
You’re paid a 25% monthly bonus from the government of up to £1000 annually
Your bonus will be paid monthly
You can take out a Lifetime ISA or Stocks and Shares Lifetime ISA, or have a combination of both
Once you have opened a Lifetime ISA you can transfer it to another provider, you are not locked in
You can pay into a standard Cash ISA and a Lifetime ISA in the same year
The amount you pay in counts towards your annual ISA allowance, which is £20,000 for the 2024 to 2025 tax year
Withdrawals are tax-free
You will incur a penalty if you withdraw the money for anything other than your first home or your retirement
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Get a conveyancing quote
If you are ready to use your Lifetime ISA to buy your first home, get a conveyancing quote and start your home owning journey today.
Can you earn tax-free interest on a Lifetime ISA?
Absolutely! When you invest in a Lifetime ISA (LISA), one of the standout benefits is the tax-free interest accumulation. This means that any interest you earn on your balances within the LISA is not subject to tax deductions.
Key Points to Consider:
Tax Efficiency: Like other ISAs, a LISA offers a tax-efficient way to save, which is especially beneficial for first-time home buyers or those planning for retirement.
Savings Growth: Over time, your savings can grow through compound interest, and the tax-free nature means you get to keep everything you earn.
Eligibility Requirements: Make sure you meet the eligibility criteria to maintain the tax-free status of your interest, such as age and contribution limits.
Opting for a LISA can be a smart move if you're looking to enjoy the dual benefit of saving for your future and maximising your interest earnings without the tax burden. However, you must adhere to the rules and guidelines outlined for LISAs to fully benefit from the tax-free advantages. And always remain informed of any changes in tax laws that could affect this benefit.
Who can open a LISA account?
To be eligible you must:
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Be 18 or over, but under 40
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Make your first payment before you’re 40
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Be a UK resident or Crown servant
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Using a Lifetime ISA to buy your first home
You can use your LISA to buy your first home at any time. However, there are a few terms and conditions you need to keep in mind.
You need to be a first-time buyer
The house you want to buy must cost £450,000 or less and be in the UK
You must purchase the property with a mortgage and at least 12 months after you make your first payment into the Lifetime ISA
You must use a conveyancer or solicitor for your home’s purchase, as the ISA provider will pay the funds directly to them
Buying a property with your partner? If you’re first-time buyers you can both benefit from a bonus when buying together, as accounts are considered per person and not per home.
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Ready to purchase your first home?
Get a conveyancing quote for your home purchase using your Lifetime ISA today.
Using a Lifetime ISA for retirement
You can use a Lifetime ISA to save for later in life and fund your retirement, as it enables you to withdraw your savings when you turn 60. If you take out your money before that, you’ll pay a 25% penalty on the withdrawn amount.
You can also take out funds from your LISA without a charge if you’re terminally ill, with less than 12 months to live.
What happens to my Lifetime ISA savings when I die?
If you die, your LISA savings will pass on to your beneficiaries. If you don’t have a will, your spouse or civil partner will take the money, without paying a withdrawal penalty.
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What do you do if you've opened a Lifetime ISA and decide not to buy a house?
If you've opened a LISA and no longer wish to use that money to buy a house you have two main options:
Continue saving for retirement - You can maintain your contributions toward retirement, taking advantage of the tax benefits associated with the Lifetime ISA. This allows your savings to grow without immediate penalties, securing your financial future.
Withdraw funds with a charge - Alternatively, you can choose to withdraw your funds. However, be aware that this will incur the 25% withdrawal charge. This option provides immediate access to your money but comes with a financial penalty. See below for more details.
Withdrawing money from a Lifetime ISA
There are a few rules you need to keep in mind when withdrawing money from your Lifetime ISA. The only reasons you can withdraw money without a getting a penalty are:
Buying a home
Retiring
Being diagnosed with terminal illness
If you take out money for any other reason the government will deduct their bonus – which is 20% of your savings – and give you a 5% penalty. This means you’ll be charged 25% of the withdrawn amount.
What do I do if my purchase falls through after withdrawing my savings?
If your house purchase unexpectedly falls through after you've closed your Lifetime ISA, don't worry, you're not out of options.
Here's a step-by-step guide on what to do next:
Reopen your Lifetime ISA: You can reactivate your LISA. This means you're allowed to continue saving and building towards future goals, like another property purchase.
Restore your savings: You're able to replace the savings that were initially withdrawn for the home purchase. This will help you maintain the tax advantages and potential bonuses associated with the account.
Consult a professional: Seek advice from a financial advisor to explore other viable financial strategies or to better understand the terms of your Lifetime ISA.
Keep Track of Timelines: Be aware of the government rules regarding the timing of deposits and withdrawals, so you can maximise your benefits without incurring penalties.
Can you use a Lifetime Isa to save for retirement after using it to save for your first home?
Yes, you can use a Lifetime ISA (LISA) to save for retirement even after using it to buy your first home, provided you keep contributing to the account.
Here’s how it works:
Post-Home Purchase Contributions: After using your LISA for a home purchase, you can continue to contribute up to £4,000 per tax year until you turn 50. Contributions still qualify for the 25% government bonus.
Retirement Savings: Any remaining funds in your LISA after a home purchase, along with subsequent contributions and bonuses, can be used for retirement. You can access these funds without penalty after age 60.
Penalty for Early Withdrawal: If you withdraw funds from your LISA before age 60 (and not for purchasing your first home), you will incur a withdrawal penalty of 25% on the amount taken out, which effectively costs you part of your own savings.
How do Cash ISAs compare to Lifetime ISAs?
When considering ISAs, you need to understand the differences between Cash ISAs and Lifetime ISAs in order to choose the right option for your financial goals.
What is a Cash ISA?
A Cash ISA is a straightforward savings account that allows you to save money in a tax-efficient manner. You won't pay tax on the interest accrued, which can make a substantial difference over time. Each tax year, you can deposit up to £20,000, offering flexibility since you can contribute incrementally rather than all at once.
Key comparisons
Purpose: Cash ISAs are versatile, suitable for general saving needs, while Lifetime ISAs are tailored for buying a first home or saving for retirement.
Contribution Limits: The Cash ISA has a higher annual contribution limit (£20,000) compared to the Lifetime ISA (£4,000), though the latter offers the 25% government bonus on contributions.
Flexibility: Cash ISAs are more flexible for withdrawals, whereas Lifetime ISAs incur a penalty for withdrawals not related to buying a first home or retiring after age 60.
Potential Returns: Cash ISAs offer tax-free interest, whereas Lifetime ISAs provide a government bonus that can enhance long-term savings.
If immediate savings flexibility is your priority, a Cash ISA may be more suitable. However, if your focus is on buying a home or planning for retirement, the benefits of a Lifetime ISA could definitely be more advantageous.
Is it worth having a Lifetime ISA?
A LISA is a good opportunity to save for the future but might not be suitable for everyone. Here are a few factors you need to consider when deciding if it’s the right option for you.
Advantages
You can take advantage of the 25% bonus, which is big compared to other investments and will give your money a boost.
You can transfer your money from an ISA to a Lifetime ISA, to benefit from the bonus. However, you need to keep in mind the terms and conditions of different ISA providers.
You can use the LISA as well as other government-backed property schemes such as Right to Buy and Help to Buy, which could help you get onto the property ladder.
Disadvantages
There’s a withdrawal charge if you decide to use your money for reasons other than buying a house or retiring
You might be charged an extra fee if you decide to move your funds from one provider to another
If you’re a first-time buyer you can’t purchase a buy-to-let
Your LISA should be up and running for a year before you can use the money to buy a property that costs less than £450,000
Which banks offer a Lifetime ISA?
You can open and manage a Lifetime ISA with your chosen provider online. You can hold as many LISAs as you’d like, as long as you don’t exceed the £4,000 annual limit. However, before doing so make sure you’ve read and fully understood the terms and conditions.
You’ll need to have the following to hand:
Your National Insurance number
Your debit card details if you’d like to open your ISA with cash
Your bank details if you’d like to set up monthly payments
The Times Money Mentor offers a list of available Lifetime ISA providers.
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What happened to the Help to Buy ISA?
Unfortunately, the opportunity has passed to save for your future home using this scheme. This type of savings account is no longer available for new applicants. However, if you already have an existing account, rest assured you can continue contributing to it until the 30th November 2029.
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