How To Find The Best Lifetime ISA

Individual savings accounts – ISAs – are government-approved financial products offering tax-free ways to save and invest.

A Lifetime ISA (LISA) is especially noteworthy because the government will reward you for saving by giving you 25% of your annual investment as a bonus each year, up to a limit of £1,000 a year.

The idea is that you use your LISA to save for a house deposit (provided you’re a first-time buyer) or for your retirement.

There are various rules around eligibility and access – more on these below.

What is a Lifetime ISA?

The Lifetime ISA is essentially a government-backed savings scheme that was launched five years ago allowing people over 18 but under the age of 40 to save, tax free, for their first home or to help supplement their retirement earnings from the age of 60 onwards. 

We explain below how the two different uses, home buying and retirement, work. 

Lifetime ISAs are offered by banks, building societies and other providers including online investment platforms and apps.

A major part of the Lifetime ISA’s appeal is that it gives your money a significant boost because the government adds to your savings.

Types of lifetime ISA

There are two types of lifetime ISA. Both versions can usually be opened online, or via an app. 

The first is the cash lifetime ISA that pays interest in a similar way to a deposit account. See Table 1  for a list of cash lifetime ISA providers.

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Table 1: Cash lifetime ISAs

* Homebuyer lifetime ISA ** Reduces to 0.25% after 1 year *** From existing lifetime ISAs

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Stocks and shares lifetime ISAs, meanwhile, offer investors exposure to the stock market. See Tables 2 and 3 below.

Over time, stocks and shares lifetime ISAs have the potential to produce superior returns to their cash-based counterparts. But there are no guarantees with stock market investments, which means it also makes them a riskier proposition where investors can potentially lose their cash.

How does a Lifetime ISA work?

If you’re aged between 18 and 39 you can open a Lifetime ISA and save up to £4,000 tax-free each year, up to and including the day before your 50^th birthday. This amount forms part of your annual ISA allowance of £20,000. 

The government then agrees to pay a 25% bonus on top of your Lifetime ISA contributions, up to a maximum of £1,000 a year. The bonus is paid every year you save money into your lifetime ISA, until you reach the age of 50. 

At this point, you can’t make any further payments into the account, or receive the bonus. But the plan continues to stay open until you reach the age of 60 when you can access the funds, penalty-free. 

Note that you can withdraw your money at any point, penalty free, once the account has been open for a year provided you are using the funds to buy your first home.

If you need access to your money for a reason other than buying a home before you reach 60, you can do so but there’s a catch (see below).

The bonus is paid monthly, if you’ve contributed that month, and should be credited to your account within one to two months. Note that the bonus is only paid on the contributions made, not any interest or investment growth that’s been achieved. 

But once the bonus is in your account, it will count alongside the rest of your money and, depending on which sort of lifetime ISA you’ve taken out, attract either interest or investment growth (or losses, should your holdings dip from their original value).

Lifetime ISA to buy a property

One use for a Lifetime ISA is to help would-be homeowners get on to the housing ladder. 

You need to be a first-time buyer (that is, never have owned bricks and mortar before) if you use a Lifetime ISA to help save for a deposit on a property. 

If you’ve inherited a property at some point but never lived in it and sold it  immediately, that would still count as having owned a property.

Note that, before you can withdraw the cash and use it for a deposit, your Lifetime ISA needs to have been up and running for a year. After that, you can withdraw your deposit money at any point – there is no need to maintain the plan until you are 40.

What the Lifetime ISA scheme is not designed to do is to help you buy a property that you immediately plan to rent out after getting your hands on the keys.

Potential home buyers should also bear in mind that the cash built up in a lifetime ISA can only be used to help buy a property valued at up to a certain amount. 

The ceiling is £250,000 for anywhere in the UK outside London, while there’s a cap of £450,000 within the London area. Neither limit has been raised since the accounts were first introduced in 2017, even though average house prices have risen by more than 20% during this period.

If your desired property is worth more than the permitted amount, you can still withdraw the money, but you’ll pay a financial penalty for doing so – a hefty 25% of the amount you intend to withdraw.

This is important to bear in mind because breaching the rules, even unwittingly, could leave you substantially out of pocket.  

A Freedom of Information request by the investment platform Hargreaves Lansdown found that the government was paid £34 million in Lifetime ISA penalties for the 2020-21 tax year alone.

You can use the Lifetime ISA in combination with other government-back property schemes such as ‘Right to Buy’ and shared ownership.

Where you’re putting the proceeds from your lifetime ISA towards buying a property, note that at the due moment, the money is transferred directly from your provider to your conveyancer or solicitor, not to you. 

Property purchases are usually expected to be made within 90 days of the money leaving your account. Where there’s a hold-up, you’d need to contact HM Revenue & Customs explaining there’s a delay.

Lifetime ISA for retirement saving

The oldest age you’re allowed to be when taking out a Lifetime ISA is 39. If you’re not looking to use the scheme for home-buying purposes but are thinking of boosting your retirement war chest, remember that you’ll have to wait more than 20 years to get your hands on the cash, penalty-free. 

Once you reach your 60^th birthday, however, you can use the money as you see fit. You receive the cash tax-free and it need not be withdrawn all in one go as partial withdrawals are allowed. Money that’s left in the account continues to attract interest or investment gains (or losses).

Although such considerations may be some way off, it’s worth bearing in mind that Lifetime ISA savings will be counted should you potentially be eligible for benefits that require means-testing.

How do I choose a lifetime ISA?

If you’re going down the cash Lifetime ISA route, bear in mind that providers pay different amounts of interest. These rates are subject to change, so it pays to shop around. 

The current interest rate range among providers varies between 0.1% and 0.6% annual equivalent rate (AER). With a 0.1% AER, a £1,000 deposit sitting for a year in a savings account would earn £1.

When it comes to the fees charged by providers of stocks and shares ISAs, these are more complicated to unravel because investment options differ from one product to another. 

Not only do prices reflect the ISA provider’s own administration charges, there are often additional fees applied by the fund managers who actually invest your money in the stock market.

A patchwork of administration fees can include annual portfolio charges, dealing charges for the buying and selling of investments, and transfer fees should you decide to move your holdings to a rival provider.

Before choosing a stocks and shares ISA provider, try to establish what sort of investor you’re going to be in order to avoid racking up extra charges. For example, if you intend to buy and sell holdings regularly, it may be worth avoiding providers that charge every time you want to execute a trade.

How do I open a lifetime ISA?

Once you’ve chosen a Lifetime ISA provider, the easiest way to open an account is either online or via an app.

To be accepted, you’ll need to confirm you’re a UK citizen and provide your name, date of birth, address and other contact information, along with your National Insurance number. 

You can only open one Lifetime ISA each year. Although you may end up with several products on the go, you’re restricted to paying contributions into just one account each year.  

Most Lifetime ISA providers accept transfers of money from existing ISA accounts elsewhere. Note that you may be charged an exit fee, should you decide to move your funds from one provider to a rival. 

Table 2: Stocks and shares lifetime ISA providers

Notes: The Share Centre Lifetime ISA has moved to OneFamily; Transact runs a lifetime ISA via financial advisers.

Table 3: Stocks and shares lifetime ISA – fees