Lifetime ISAs (or LISAs) are savings accounts that share some similarities with ‘normal’ individual savings accounts (ISAs).
They have been around since 2017 and can be useful for people looking to get on the property ladder or plan for future life.
But, unlike other ISAs, they are not available to everyone and come with a strict set of rules.
What is a Lifetime ISA?
At the moment, you can pay up to £4,000 each tax year – and the government will add a 25% bonus. If you pay the maximum amount each tax year, you will receive an annual top-up of £1,000 from the government.
What is the difference between an ISA and a LISA?
There are some key differences between ISA and LISA.
The annual limit you can pay into an ISA each tax year is currently £20,000. This is five times the current LISA limit.
Unlike a regular ISA, the Government tops up your LISA contributions by 25%. But there are age limits on who can open a new LISA.
And while you can access a regular ISA at any time (subject to any notice period you may have agreed), if you make an unauthorized withdrawal you will have to pay a penalty, which will be equal to 25% of the amount withdrawn. At first glance, receiving a 25% bonus and then being subject to a 25% penalty might seem to cancel each other out. Unfortunately, however, the math doesn’t work that way.
What are the rules for a LISA?
There are some precise rules regarding the eligibility of LISAs and how they can be used.
- You can only open a LISA between the ages of 18 and 40
- You can pay a maximum of £4,000 per tax year
- You can only withdraw from a LISA to pay for your first home when you reach 60 or if you are terminally ill and are estimated to have less than 12 months to live.
Once you open an account, you can add it whenever you want (as long as you don’t exceed your annual contribution limit).
Can I withdraw from a LISA at any time?
Technically yes, you can, but LISAs are not designed to be used for general savings and you will be penalized if you make a withdrawal other than for one of the reasons listed below.
There are only three occasions where you can access your funds without paying the penalty:
- When buying your first property (up to £450,000)
- When you reach 60
- If you are terminally ill and have less than 12 months to live
If you withdraw your money at any other time, you will have to pay the state a penalty equal to 25% of what you are withdrawing. This allows the Government to claw back the 25% bonus they paid on your deposits, plus a little extra to dissuade you!
So unless it’s a real emergency, it’s normally not a good idea to withdraw your money until you reach one of the life stages that LISAs are designed for.
At what age can I open a LISA?
You can open a LISA once you turn 18 and at any time up to age 40.
Once you open an account, you can continue to pay up to the annual limit (and receive the Government top-up) until you turn 50.
If you don’t use the money to buy a property, it will stay in the LISA until you turn 60, when you can withdraw it without penalty.
Although government bonuses will stop when you stop paying at age 50, your savings can continue to grow as long as they remain in the LISA account.
Can I invest in stocks and shares with a LISA?
Yes, you can opt for a LISA that invests in stocks and shares. This may mean that your money could grow more than a cash account would, but you should remember that you can also see the value of your investments fall – and that means you could eventually lose money.
How long does it take to get money from a LISA?
It depends on the terms and conditions of the financial institution you save with, but you should receive your money immediately after you request it, sometimes on the same day, depending on your provider.
Are you charged for withdrawing money from a LISA?
If you withdraw money to buy your first home, when you turn 60, or when you are diagnosed with a terminal illness and have less than 12 months to live, there are no costs to withdraw your money from a LISA.
In any other case, you will have to pay an early withdrawal penalty equal to 25% of the withdrawn funds.
How much can you save on a LISA each year?
The annual limit for LISA contributions is currently £4,000 (plus up to £1,000 as a government bonus).
Do you pay taxes on a LISA?
No, you do not pay tax to HM Revenue & Customs on any earnings you make within a LISA. Any interest you earn or investment gains you make are tax-free, as is the case with regular ISAs.
Can a parent open a LISA for a child?
Unlike children’s pensions, which can be activated as soon as you are born, LISAs are intended for people aged between 18 and 40.
Of course, there is nothing to stop a parent from giving an adult child money that the child then puts into a LISA, but they are not designed to allow parents to save money on behalf of their young children.
How risky is a LISA?
If you opt for a cash LISA, your money should be safe in the same way as standard bank savings accounts are, and its growth will be linked to interest rates.
If you opt for a LISA investment, your savings will be based on the performance of the stocks and shares you have invested in. In the long term, there is the potential for your investments to grow, but there is also a risk that the value of your investments will fall, which is why you should seek advice before investing.
Can you lose money with a LISA?
Yes, you can lose money in a LISA if it is a stocks and shares account.
But remember that the State tops up your savings with a 25% bonus on everything you invest, so even if there is a small drop in the value of your investments, the LISA could still be worth more than the money you put in.
You can also lose money if you withdraw without reaching one of the designated life events, due to the 25% penalty.
Is it worth getting a LISA?
- Government bonus: The biggest benefit comes from a generous government bonus, equal to 25% of the amount paid. Under current rules, the bonus is up to £1,000 each year and that money can grow over several decades. If you open a LISA when you turn 18 and don’t make withdrawals until you get older, you could receive up to £32,000 in government grants.
- Understanding your goals in life: LISAs are designed to help you purchase your first home or retire. So if you don’t plan to buy a property, or if you’ve already bought a house, you won’t be able to touch the money until you turn 60 (or become seriously ill). If you want a savings account with more opportunities to access your money, a LISA may not be right for you.
- Climb the property ladder: If you intend to invest the money you save in your LISA into your first property, the house must be one you can live in – you can’t buy one and then rent it – and it must not be worth more than £450,000. You must also have held the LISA account for at least 12 months before you can withdraw from it for a deposit. If you and your partner both have LISAs, you can combine them into one purchase as long as you are both first-time buyers. You can also use your LISA to buy a property with someone who has a Help to Buy ISA.
Is it worth doing a LISA for retirement?
LISAs can also function as an alternative pension scheme for self-employed workers.
Next steps
The important thing to remember is what a LISA can and cannot be used for and to treat it as a long-term investment.
The earlier you start paying, the more you will have when you need to put down a deposit on your house, or when you retire with a comfortable nest egg to supplement your job and state pension.
Please note that the value of investments and any income from them can go down as well as up and you may not get back the amount originally invested. The past is no guide to the future.
Tax benefits depend on individual circumstances and applicable laws may change.