Intro
A Lifetime ISA (LISA) is a good starting point to start saving for your first home or for your retirement. It is a type of tax-free Individual Savings Account (ISA) for UK residents, which is topped up with a government bonus.
Are you eligible?
Anyone aged between 18 and 39 can open a Lifetime ISA, if they are a resident in the UK, or are a Crown servant (meaning working at a diplomatic or overseas civil service), as well as their spouse or civil partner. For children between 16 and 18, Junior ISA accounts are available.
If you plan to buy a home with someone else who is also a first-time buyer, you can each open an account and start saving money into your own account. When you decide to buy, you can use the two accounts combined, provided you both match the eligibility criteria.
Where to look for Lifetime ISAs?
You can open ISAs with banks, credit unions, stockbrokers, peer-to-peer lending services, crowdfunding companies, building societies (organizations owned by their members, which offer banking and other financial services), friendly societies (mutual associations with a common financial purpose), and other financial institutions.
How to choose a provider?
It is best to compare the different providers. There are several aspects you might want to take into consideration when deciding between account managers. These include how much interest the provider offers, whether they charge for transferring your savings, and if the Financial Services Compensation Scheme (FSCS) covers them, which means that your savings and investments are protected up to £85,000. Once you have chosen a provider, you'll need to apply to open an account directly with them.
You can only invest a maximum of £4,000 in a tax year in a LISA, and the state adds a 25% cash bonus a year on top of your investments, meaning a total £5,000 a year if you invest the maximum amount. Plus you earn interest on what you have saved, which is tax-free.
You can invest in either a cash ISA or a stocks and shares ISA, or have a combination of both for your Lifetime ISA. Keep in mind that the amount you invest in your Lifetime ISA will be deducted from the maximum ISA allowance you can save annually, which in the 2021/2022 tax year is £20,000. This means that if you invest £4,000 in a Lifetime ISA, you can use the remaining £16,000 to invest in other types of ISAs.
You can hold multiple Lifetime ISAs at once; however, you can only open and pay into one Lifetime ISA in each tax year. If you want to change providers, you can transfer your account with the entire sum.
Some financial institutions allow you to open a Lifetime ISA with as little as £1. The earliest you can use the fund is one year after making your first deposit.
What happens if I want to withdraw my money?
Bear in mind that if you withdraw money from your account before you hit 60 for any other reason than buying your first home, you will be charged 25% of the amount withdrawn, essentially wiping out the government bonuses you received on your investments over the years.
Further reading
- Everything you wanted to know about ISAs
- What is an ISA: an in-depth guide to tax-advantaged savings for UK residents
- How much can you put in an ISA?
- How many ISAs can I have?
- What is a Lifetime ISA and how best to use it?
- What is a cash ISA?
- What is a Junior ISA?
- What is a flexible ISA?
- What is an Innovative Finance ISA?
- How to transfer your ISA?
- How does an ISA work?
- Which is the better investment: pension or ISA?
- Is ISA only for UK citizens?
- What is the safest ISA?
- What happens to my ISA if I move abroad?
- Does an ISA beat inflation?
- Interest on cash ISA: much do they pay?
- IBKR offers global access with local benefits for ISA holders
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