Lifetime ISA turns five: how one investor turned £12,000 into £215,000

The new tax year marks five years since the Lifetime ISA was launched, after George Osbourne’s surprise announcement just a year earlier that he was creating a hybrid of the Help to Buy ISA and pension. A faltering start with a few providers and slow take-up has since been forgotten as wannabe first-time buyers flock to the accounts, as well as those saving for retirement.

More than 775,000 Lifetime ISAs have been opened since they launched in April 2017*, based on Government data gained through an FOI. In the past year 232,000 people have opened a Lifetime ISA to start saving for their first home or retirement. What’s more, around £3bn has been paid into Lifetime ISAs**, with almost £600m of that being Government bonus money.

How much could you save?

Someone who opened a Lifetime ISA in the first month they were available and saved the maximum £4,000 a year would have been given £5,000 in free Government cash and would be sitting on just over £29,000 today, assuming investment growth of 5% a year. With the average UK house price sitting at £270,000, that would give you enough money for a 10% deposit. Even in London, where property prices are much higher you’d have enough money for at least a 5% deposit on a property.

However, with some very fortunate investment returns you could have even more. The highest value Lifetime ISA with AJ Bell Youinvest is £215,000, based on just £12,000 of contributions and £3,000 of Government money. The investor made a lot of money buying electric car maker Tesla at an average price of around £60 a share, and it has now shot up to more than £800 a share.

Most investors won’t see their investments rocket to that level, but picking between a cash and investment Lifetime ISA is an important first step. With inflation expected to hit 7% next month anyone with their long-term savings in cash needs to assess if it’s in the right place. Generally the rule of thumb is that if you plan to use the money in the next five years you’re safer sticking to cash, but the fact that no cash Lifetime ISA comes anywhere near inflation means that savers are locking in a loss in real terms each year.

The current top rate cash Lifetime ISA pays 0.85%, according to Moneyfacts***, meaning that if you saved the full £4,000 a year, topped up with £1,000 from the Government, over five years you’d generate only £645 in interest. In comparison, if you invested the money and earned 5% returns a year you’d generate £4,010 over the five years – almost £3,400 more. What’s more, that top-rate cash account includes a bonus over 12-months, meaning that you’d need to shift your cash when that ended and switch to the highest paying account at the time.

More about our Lifetime ISA

Where are Lifetime ISA investors putting their money?

We’ve delved into the archives to look at how AJ Bell customers have invested in their Lifetime ISA since the product launched in 2017, looking at the most popular funds, shares and investment trusts in their portfolios.

Broad market trackers are very popular, with three global trackers and one US tracker taking the top spots. And Lifetime ISA investors appear to shun much of the home bias we usually see in investors, instead plumping for global funds such as Fundsmith Equity, Lindsell Train Global Equity and Scottish Mortgage.

The age profile of Lifetime ISA investors, who will be 18-40 when they open the accounts, is reflected in the fact that an ESG fund makes it into the most popular list – Baillie Gifford Positive Change. This fund, launched a few months before the Lifetime ISA, invests across the world but focusing on companies that can improve things like social inclusion or the environment. And it’s delivered very well for investors, returning 201% over the past five years. That means if you’d invested your first year of Lifetime ISA contributions, plus the Government bonus, in the fund and left it invested with no further contributions you’d have turned that £4,000 investment into more than £15,000 today. However, it’s not for the faint hearted or risk averse, having lost 21% in the past six months.

The most popular investments also have a heavy tilt towards technology funds and stocks, from Polar Capital Global Technology and Polar Capital Technology trust to tech-heavy trust Scottish Mortgage to Tesla making the top shares list. Tech stocks boomed over the past five years, helping to propel Lifetime ISA investors’ portfolios, with the FTSE World Technology index returning 170% over that period. However, tech stocks have been volatile in the past few months, showing they may not be ideal investments for the risk-averse.

Source: AJ Bell Youinvest Lifetime ISA most bought investments from 2017 – 2022

How does the Lifetime ISA work?

Lifetime ISAs can be opened by savers over the age of 18 and before their 40th birthday, and they can pay in up to £4,000 a year until they turn 50. Savers will receive a 25% government bonus on any money they pay in, up to £1,000 a year. So a saver who puts £4,000 a year into a Lifetime ISA from the age of 18 will get a £32,000 bonus, before any interest or growth (assuming these limits and Lifetime ISA rules are unchanged).

But you can only withdraw the money to buy a first home, and/or from age 60. If you withdraw the money for any other reason you will face a 25% exit penalty, which works to recoup the Government bonus but also takes back some of your original investment. For example, if you invest £4,000 you’ll get the 25% government top-up and have £5,000 in total. If you withdraw this entire amount not for a first home or retirement you’ll be charged 25%, which equates to £1,250. This means you have £3,750 left, £250 less than your initial investment.

Buying for a first home: you can use some, or all, of your Lifetime ISA to buy a home up to the value of £450,000, as long as you’re a first-time buyer and buying with a mortgage. If you’re buying with a partner, both of you can save in separate Lifetime ISAs and each receive the bonus. However, you must have the Lifetime ISA open and have made your first contribution 12 months before you can use the money to buy your first home.

Saving for later life: once you reach the age of 60 you can withdraw your entire Lifetime ISA tax-free. You can also continue paying in, and earning the bonus, until you turn 50, even if you've used your Lifetime ISA to buy your first home.

If you already have a Help to Buy ISA, you can transfer it into a Lifetime ISA, and you'll get the 25% government bonus on it. Any transfers you make will count towards the £4,000 annual Lifetime ISA limit, so if you have more than that saved in your Help to Buy ISA you’ll need to make the transfer over a number of tax years.

*Data based on an FOI, is based on when the Government started collecting the data and runs until 5 March 2022, full figure is 776,900
**Data to April 2020, the latest available.

***Account is the Moneybox Cash Lifetime ISA, which includes s 0.6% bonus over 12 months.

Remember that the value of investments can change, and you could lose money as well as make it. How you're taxed will depend on your circumstances, and tax rules can change. Tax and LISA rules apply. A Lifetime ISA isn't for everyone. If you withdraw money before age 60, unless it's to buy your first home, you'll pay a government withdrawal charge of 25%. And if you choose to save in a Lifetime ISA instead of enrolling in, or contributing to, your workplace pension scheme, you'll miss out on your employer’s contributions. Your current and future entitlement to means-tested benefits may also be affected. Past performance is not a guide to future performance.

These articles are for information purposes only and are not a personal recommendation or advice.