What is a Lifetime ISA?
Lifetime ISAs are a type of account that help you save for two very important goals – your first home in the UK, and your retirement.
As well as being tax free, the government hands you a generous 25% bonus on the money you pay in. However, if you choose to use it for another reason, you could face a 25% penalty charge on the total money in your account, meaning you could end up getting back less than you put in.
You can apply for a Lifetime ISA if you’re age 18–39 and a UK resident. And once you’ve opened an account, you can continue to pay in until you reach age 50. Watch our Lifetime ISA explainer video below for a quick summary of how they work.
Is a Lifetime ISA right for you?
When it comes to investing, it's important to really know the ins and outs of each account and what you're getting into. A Lifetime ISA might not be for everyone, so before you open an account, take a look at who would most likely benefit.
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Access to your savings
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Potential home-buyers
Might be right for you if… Might be wrong for you if… You’re a first time buyer
You’ll be buying an eligible property more than 12 months of first paying into a Lifetime ISA
The property will not be worth more than £450,000
All of the above (and more) will need to apply to avoid the government penalty charge.
You aren’t a first time buyer
You’ll likely want a house worth more than £450,000
You want to buy your first home within 12 months
You won’t need a mortgage
You’re purchasing a buy-to-let
If any of the above apply, you’ll face the government penalty charge.
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Saving for retirement
Might be right for you if… Might be wrong for you if… You’ve maxed the matched pension contributions from your employer pension contributions
You’re self-employed and want to start saving for retirement
You don’t want to access this retirement pot until you are at least age 60
You’ll want to access the money before age 60
You’ll be opting out of your workplace pension to pay into a Lifetime ISA
You receive certain means-tested benefits, or plan to apply for them in the future
Cash vs investment LISA
There are two main types of Lifetime ISA:
- Cash – acts as a standard cash savings account. You can earn interest on the money you put in, including the 25% bonus.
- Investment – invest your money into assets like shares, funds, bonds, exchange-traded funds (ETFs) and more.
Which is better for you depends on your personal circumstances. For example, an investment Lifetime ISA will be more suitable if you’re saving for the long term – because it’s generally a good rule of thumb to put your money in the markets for five years or more.
At AJ Bell, we only offer an investment (Stocks and shares) Lifetime ISA.
Explore our investment LISAHow does a Lifetime ISA work?
You can pay in up to £4,000 per tax year into a Lifetime ISA. This £4,000 usually counts towards your overall £20,000 ISA annual allowance.
Let’s look at the main advantage of a Lifetime ISA: the bonus. This 25% top-up from the government gives you up to an extra £1,000 each year to help you invest towards your goal.
Just remember that though you can have a Lifetime ISA with more than one provider, you can only pay into one account each tax year.
However, transferring between Lifetime ISA providers won’t affect your annual LISA allowance. For example, we’re one of the only providers that accept transfers in for people who’ve turned 40 since they opened their original LISA. Learn more about transferring over age 40.
How does the Lifetime ISA government penalty work?
There’s two ways you can withdraw money from your Lifetime ISA without facing the penalty charge:
- When you buy your first (eligible) home in the UK
- When you reach age 60
You can also withdraw money penalty-free if you’ve been diagnosed with a terminal illness.
If you withdraw for any other reason, you’ll face the 25% government penalty charge. As this applies to the value of the whole withdrawal, it claws back not only the original government bonus, but also some of the money you paid in yourself.
Example
Let's say you saved £1,000 into a Lifetime ISA and received a 25% government bonus of £250. Here's how the penalty charge would be calculated if you were to withdraw money thereafter.
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Total money in account: £1,250 Later that year, you decide to withdraw £1,250 from your account. 25% penalty charge: £312.50 Amount you get back: £937.50 Total loss you've made: £62.50 The total amount you get back is 6.25% less than the £1,000 that you originally paid in, due to the penalty charge. |
So, if you’re considering a Lifetime ISA and you won’t be using it towards your first home in the UK, you need to make sure you’re comfortable locking the money away for the long term.
For more information, take a look at our Lifetime ISA key features document and terms and conditions to help you decide if our Lifetime ISA is right for you. And remember, the tax rules and benefits of ISAs may change in the future.
What are the benefits of a Lifetime ISA?
As with other Individual Savings Accounts, in a Lifetime ISA, your money and investments can grow free from UK tax. But the main Lifetime ISA benefit is the 25% bonus the government add to whatever you pay in. This top-up can be as much as £1,000 a year.
As long as you open a Lifetime ISA before you turn 40, you can continue to pay in and benefit from the bonus every year until you’re 50.
The table below shows how the Lifetime ISA bonus really adds up. For example, if you who pay in the maximum amount for five years, you’ll get £5,000 in government bonuses. That’s a total of £25,000 paid into the account, before any interest or growth.
| Years paying in | Maximum you can pay in | Maximum you'll get in government bonus | Total paid into your Lifetime ISA* |
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| 2 | £8,000 | £2,000 | £10,000 |
| 5 | £20,000 | £5,000 | £25,000 |
| 10 | £40,000 | £10,000 | £50,000 |
| 20 | £80,000 | £5,000 | £85,000 |
| 32 | £100,000 | £32,000 | £132,000 |
*Before any growth or charges
Once you reach age 60, you can access your Lifetime ISA tax-free for any purpose and without any penalty.
What can the account be used for?
The Lifetime ISA is designed for two purposes: to help you save for your first home, and/or for later life.
Buying a house
You can withdraw money from your Lifetime ISA before age 60 penalty-free, if you're using it to buy a first home in the UK. But there are a few restrictions you need to keep in mind:
- You must be a first-time buyer. This means you can’t own, or have owned, a home in the UK or overseas.
- The Lifetime ISA needs to have been open for more than 12 months – the clock starts from the date of your first payment in.
- The home must be worth no more than £450,000.
- You must be buying a home you plan to live in – not a holiday home or somewhere you’ll rent out.
- You must use a mortgage.
Buying a property together?
If you want to buy a home with your partner and you both meet the eligibility criteria, you can combine your Lifetime ISAs to buy a property together, so long as the property price is less than £450,000.
(If only one of you has a Lifetime ISA, then that also works, as long as the property still meets the above rules.)
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