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Lifetime ISA – there IS such a thing as free money

12–14 minutes to read

A Lifetime ISA (LISA) can help you boost your savings for your first home or add additional cash to your retirement pot with very little effort. In fact, if you saved the maximum amount into your LISA for each eligible year you’d receive £33,000!

With house prices skyrocketing it’s never been harder for first-time buyers to get on the property ladder. Lifetime ISAs have been designed with this in mind. They offer you a helping hand to boost your deposit by 25%. This could be the helping hand you need to get into your first home quicker. 

Of course, you could also use your LISA to boost your retirement fund. Either way, here’s everything you need to know about Lifetime ISAs including the restrictions and limitations so you don’t get caught out. 

Want to know everything about ISAs and the other types available? Check out our Ultimate ISA Guide To Powerful Tax-Free Savings.

Heads up – We aim to produce honest and accurate content, however, we are not financial advisors. If you need financial advice, Unbiased can connect you with a suitable professional for free. Some of our links may earn us a small commission to help us run the site.

What is a Lifetime ISA?

A Lifetime ISA is a specific type of ISA that can only be used for two purposes:

  • Buying your first home
  • Saving for later life

As with any ISA, it is a tax-free wrapper, which means any interest or earnings your money makes inside a LISA is free from tax.

Additionally and unlike any other ISA, the government will add 25% of what you do, up to a maximum of £1,000 per year. This is a huge boost for savers.

All ISAs are individual savings wrappers. This means if you plan to buy a  house with someone else you can both get up to a £1,000 per year bonus.

All of this means that Lifetime ISAs are usually a great fit for those looking to purchase their first home. However, make sure you read through the limitations further down to ensure you don’t get caught out by some of the rules.

Lifetime ISA (LISA) - what you need to know

  • £4,000 is the maximum you can contribute each financial year (April to March).
  • All interest and earnings are tax-free.
  • Government adds 25% to your contributions in the 4-9 weeks after you deposit your funds.
  • Can’t be withdrawn until 60 unless it’s used to buy your first home.
  • Each party buying the home can use their LISA (a couple can have two LISAs, one each).
  • Must be 18 or under 40 to open.
  • Can keep contributing to a LISA up to age 50.
  • Each individual can only have one LISA.
  • You can transfer your LISA between providers if required.
  • You can contribute to other ISA types as well as your LISA.
  • Your money is protected up to £85,000 under the FSCS.
  • Cash or Stocks and Shares LISA options are available.
  • The maximum house price is £450,000.
Lifetime ISA LISA Need to know

How does the free 25% work with Lifetime ISAs?

The Government wants people to buy their own homes and encourage them to save for later life. So, it offers an incentive for us to get started, similar to pensions where you don’t have to pay tax on deposits.

The Government will contribute 25% of whatever you put in, up to £1,000 per year.

It’s paid monthly but can take 4 – 9 weeks to hit your account.

Even better, the £1,000 bonus doesn’t affect your annual ISA allowance.

If you put the full £4,000 LISA allowance you’ll end up with a total of £5,000 in your account. Additionally, you’ll still have £16,000 left in your annual ISA allowance for the year.

And if you started from when you were 18 years old and continued putting in the maximum £4,000 per year till the age of 50 you’ll end up with a massive £33,000 free!

If you’re a first-time buyer, maybe you’d have hoped to buy your first property by age 50. But if you’re using a Lifetime ISA for later life, think of that free money plus the effect of 40+ years compound interest!

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Do I have to pay back the 25%?

Here’s the rub: whilst you can withdraw money at any time before you are 60, if you’re not using it for a first-time home purchase, you’re going to get penalised 25% of your funds. This may appear to be the Government bonus simply being taken away but in reality, it’s worse than that:

Example: Imagine you had saved £4,000 in a single tax year and received an extra 25%. You’d now have £5,000 (excluding interest for sake of ease). If you then closed the account and didn’t use the money for the intended Lifetime ISA purposes, you would be penalised 25% of that £5,000. That means a penalty of £1,250, so you’d actually get back only £3,750.

You don’t pay the 25% penalty if:

  • You use the funds for a first-time home purchase
  • Withdrawing after age 60
  • You die
  • Are terminally ill with less than 12 months to live
  • Property is left to you, but the person gifting you the house is still alive

But you do pay the 25% penalty if:

  • You withdraw the money before age 60 for purposes other than a first-time home purchase
  • You inherit a house a try to use your Lifetime ISA to buy a property, as you are no longer a first-time buyer. In this case, it’s likely better to leave the funds accumulating until you can withdraw the money penalty-free at 60. Consider it an early retirement present to yourself.

Who is eligible for a Lifetime ISA?

The conditions of who can open a Lifetime ISA are a little more restrictive than usual in that they have a top-end age limit.

  • Minimum Age = 18
  • Maximum age = 39
  • Individuals only (Joint ISAs don’t exist)
  • Those saving for a first home or retirement

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What are the types of Lifetime ISA?

There are two main types of Lifetime ISA:

  • Cash LISA
  • Stocks and Shares LISA

These are essentially the same as their ‘normal’ ISA versions.

Cash ISA is essentially a savings account and you don’t pay tax on the interest. And as the name suggests, a Stocks and Shares ISA is where you will be investing.

The only difference is that the money sat inside either flavour of Lifetime ISA is subject to the specific LISA conditions, including your 25% bonus.

If you are considering a Stocks and Shares LISA then it’s best to get clued up on investing. Our Beginner’s Guide to Investing can help you understand to ins and outs of investing to ensure your financial future is bright.

Lifetime ISA for first-time buyers

There are some additional conditions when using a Lifetime ISA to make a home purchase. Make sure you understand these before opening a LISA to make sure you don’t fall foul to the rules:

  • For first-time buyers only – you can not have ever owned a property in the UK or anywhere in the world before.
  • Maximum home value of £450k – if you’re likely to purchase a home above this value then you won’t be able to use your LISA.
  • You must have held the LISA for 12 months or more – you need to plan in advance, your first deposit needs to be at least 12 months before you need to buy your house. You can open an account with a small amount to make sure you check this box.
  • You must be planning to live in your new home – LISAs are not available to those who plan to purchase a buy to let.
  • Must be using a mortgage – cash buys do not qualify.
  • Cannot be used with the bonus from a Help to Buy ISA – You must choose one or the other, not both.

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Buying a property with someone else

If you’re both eligible to use the Lifetime ISAs, then these can be combined and used to purchase the same property. This can give you a combined savings boost of up to £2,000 per year!

If one of you isn’t eligible and the other is, the person who is can still use their Lifetime ISA towards the joint home purchase.

If your partner owns a house already and you would like to be added to the property deeds you can still use your LISA if you qualify.

What about Help to Buy ISAs

If you have a Help to Buy ISA and a Lifetime ISA, you can only use the bonus from one of these products to purchase a house.

Lifetime ISA allows you to save a healthy £4,000 per year, versus £2,400 in a Help to Buy ISA. As long as you don’t plan to buy a house within 12 months, then a Lifetime ISA can provide greater rewards.

If you think it’s worth it, you can convert or transfer a Help to Buy ISA into a Lifetime ISA.

However, there are flexibility benefits with a Help to Buy ISA. You can withdraw your initial deposit without penalty (and without the bonus of course) if you choose to. Withdrawing from a Lifetime ISA, however, will mean you have to pay back 25% of your LISA balance. Meaning you’ll forfeit your bonus and a small amount of your deposit. So, before transferring to a LISA make sure you are going to use your cash for a house purchase.

For more information on a Help to Buy ISA and whether they are better than a Lifetime ISA, check out this article.

How much can I pay into a Lifetime ISA?

The current Lifetime ISA allowance is £4,000. This means you can deposit up to £4,000 per year into your LISA account.

Whatever you pay into your Lifetime ISA will be deducted from your £20,000 annual ISA allowance. The government bonus of 25% does not count towards your annual ISA allowance.

The annual LISA allowance has remained unchanged since its introduction in 2017.

Can I have a Lifetime ISA and a pension?

The short answer is yes you can. But it’s important to understand if you need both.

For most people, paying into a Workplace Pension Scheme is a far better option as your employer will add additional contributions. You’ll need to check the details of your companies scheme but many will match your contributions.

For example, if you put in 7% of your salary your employer may match this. With a LISA you get a 25% bonus, but if your company matches your contributions you’ll double your money immediately.

For higher-rate tax-payers, contributions into a pension receive 40% tax relief making pensions contributions. This beats the LISA bonus however if you are depositing large amounts into a pension then you’ll need to be aware of the Lifetime Pension Allowance.

For others, such as the self-employed, then a SIPP (Self Invested Personal Pension) is usually the way to go, but again it depends on your personal circumstances.

Pensions are usually more efficient, as they take money from your gross pay before you are paid and taxed.

Finally, you can access your pension between 55 and 57 depending on your age. LISA’s can be accessed until 60. Crucially, however, you can access your full LISA pot at age 60 whereas you can only get access to 25% of your pension in your 50’s without paying tax.

We’ve written a more complete article on this challenge that may help you decide the right option for you – Lifetime ISA – Better Than an ISA or Pension?

Can I pay into a Lifetime ISA and Cash ISA?

Yes, you can pay into different types of ISA during the tax year. So for example, you can pay into both a Lifetime and Cash ISA as long as you stick to their conditions.

However, be aware that you can only pay into one ISA of a certain type per tax year. This means you cannot pay into two Lifetime ISAs or two Cash ISAs.

To understand ISAs, their benefits and their limitations check out our Ultimate ISA Guide.

Where can I get a LISA?

You can open a Cash LISA with most high street banks and financial institutions. It’s best to check out the best buy tables and search for the most competitive rates.

Providers that offer a Stocks & Shares LISA are more limited. The main providers are Hargreaves Lansdown & AJ Bell. Newer players on the market like Nutmeg & Moneybox also offer LISAs with limited investment options.

WARNING: Investments in Stocks & Shares are generally considered riskier than the cash equivalents. Investments in Stocks & Shares should be considered over a 5+ year investment horizon. If you need your cash for a house deposit within a few years then a cash LISA will ensure your capital is not put at risk. Please read Investing for Beginners to help get your investing journey started successfully.

If you want more information on platform providers here are our reviews for Hargreaves Lansdown & Moneybox.

For the current LISA best buys check out Money Saving Expert.

Lifetime ISAs - Final thoughts

A Lifetime ISAs can provide a great springboard to boost your savings. For those looking to buy a house, LISAs should be one of the top products when considering where to store your deposit money. Nowhere else are you going to get a 25% boost to your cash so easily.

For couples looking to buy their first home, funnelling cash into a LISA could help get you into your dream home quicker. However, beware of the £450,000 house price cap. with house prices rising so fast many of those in high cost of living areas may fault foul to this cap.

For those thinking of going down the Stocks and Shares LISA route, make sure you read up about investing. Making the wrong decisions could lose you money and stop you from getting into your new home. As you get closer to buying your home ensure you have your deposit in cash as we never know what crisis is just around the corner.

If you plan to use a LISA for retirement, then it’s worth checking if a pension is a better option for you. LISA vs Pension: Which is best for you?

There is a lot to consider and everyone has a different financial situation. If you want to chat with other like-minded individuals and gain some group knowledge then please join our free UK Personal Finance Club

Here’s to Financial Fitness

EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. If you need financial advice Unbiased can connect you with a suitable professional for free. Investments may go up as well as down and you may get back less than you put in.