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Budgeting & Banking

Lifetime ISA guide

Stressed over how you'll ever afford to buy a house? A Lifetime ISA could get you £1,000s of free cash for your first home. 

woman thinking next to house on money

Credit: Ink Drop (background), WAYHOME studio (foreground) – Shutterstock

A recent survey in our Facebook group found that approximately 40% of students had either never heard of the Lifetime ISA, or didn't know what it's for. With as much as £1,000 a year of free money up for grabs, we consider it our duty to shout about it!

The main draw of the Lifetime ISA (essentially a souped-up tax-free savings account) is that, for many young people, it could be the only hope of scraping together enough money to get on the property ladder.

LISAs are also a really great way to get into the habit of putting money aside each month, and there's no minimum monthly savings amount, meaning you can save as little as you like. So, how do they work?

Lifetime ISA summary

student houses Headingley

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If you don't have time to read about the LISA in detail, here's a quick summary of all the main details:

  1. You can pay a maximum of £4,000 into your Lifetime ISA each year.
  2. The government will then give you a bonus of 25% of what you save (so a maximum of £1,000 each year).
  3. The earliest you can use your LISA fund is one year after opening it.
  4. You're able to make deposits and get the 25% bonus on savings each year up to the age of 50.
  5. You can't use the money in your LISA unless it's to buy your first home, you're aged 60 or over, or (sadly) if you're terminally ill with less than 12 months to live.
  6. The maximum house value you can put the LISA towards is £450,000 (on a property anywhere in the UK).
  7. You can combine your LISA with a partner to buy a house (who can also use their own LISA).
  8. You can't use the LISA to buy a property to let – you must intend to live there.
  9. You are allowed to have a Help to Buy ISA open at the same time as a LISA, but you cannot use both to buy a property with (note: you can no longer open Help to Buy ISA accounts).
  10. You can transfer any Help to Buy funds into your LISA.
  11. WARNING: If you withdraw the money early (i.e. before age 60 without putting it towards your first house) you'll be charged a 25% fee (equivalent to losing your 25% bonus and a fine of 6.25% on what's left).

What is a Lifetime ISA?

pink piggy bank

Let’s start with the basics: an ISA (Individual Savings Account) is a bank account that allows you to save cash tax-free each year.

Previously, the appeal of an ISA was that you’d be required to pay tax on the interest earned in a regular savings account, whereas ISAs were exempt from tax (provided that you stick to the rules – more on that later).

However, now basic-rate taxpayers (anyone earning less than £50,000 per year) can earn up to £1,000 of interest each year across all of their accounts without having to pay any tax.

This has lead many to suggest that the ISA is now defunct. Whether or not this is true for standard ISAs is a debate of its own, but one thing's for sure: the Lifetime ISA (LISA) is a different kettle of fish, and one we're very fond of.

The LISA is, in part, the government's way of helping young people get on the property ladder, contributing an extra 25% on top of what they save in order to pay the deposit for a first home.

We'll go into more detail later on, but you could earn up to an additional £1,000 per year in free money from the state.

And, if you're not interested in using the LISA to buy a property, it can also be used as a retirement fund (more on that below).

Should students get a Lifetime ISA?

university with bags of money

Clearly, Lifetime ISAs are a great saving option for anyone who is thinking about securing their future – and that includes students and graduates.

Preparing to buy your first home or thinking about retirement might sound a little crazy to you right now, but it’s worth remembering that saving takes time. As such, it’s good to start thinking about this stuff as early as you can.

It's also worth noting that having a LISA won't affect how big a Maintenance Loan you're eligible for or have any impact on Student Loan repayments.

Reasons to open a LISA

Here are some good reasons to open a Lifetime ISA:

  • You’ve received some inheritance money after a family member has passed away, and are unsure about how to invest it.
  • You find you normally have a bit left over after Maintenance Loan payments come through, but normally just put it in a savings account or treat yourself to something nice.
  • You’re thinking about buying your first home within the next 10 years.
  • You’d like to become self-employed after uni, so might not have a pension scheme.
Want an ISA that allows you to access money when you need it? We've researched the best ISAs available to students and listed them here.

What is a Lifetime ISA for?

You can only withdraw money from your Lifetime ISA (without being charged) in three instances.

Other than having a terminal illness and being given less than 12 months to live (sorry it's bleak, but we had to mention it!), the other two instances in which you can withdraw from your LISA are:

Buying your first house

woman using laptop next to boxes

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If you’re thinking about getting on the property ladder as soon as possible, the LISA is a great choice as long as you are:

  1. Looking to buy a property in the UK
  2. Don’t already own a property or have a share of a property (anywhere in the world)
  3. Are planning to buy a property to live in yourself rather than rent out to others
  4. Will be looking to buy a house that costs less than £450,000.

You and a partner can combine your LISAs to purchase a new property together.

And, crucially, your LISA won't automatically be closed once you purchase a property. You can either choose to close it or continue using it to save towards a retirement fund.

Saving for retirement

titanic it's been 84 years

Credit: Paramount Pictures

If you start saving for a property but then, for whatever reason, decide you don’t want to use the LISA to buy your first home, you can avoid losing your bonus money by continuing to use your LISA as savings for retirement.

You don’t have to do anything in this situation, but it does mean you won’t have access to the money until your 60th birthday (although the bonuses will stop being paid from your 50th birthday onwards).

If you do decide to use your LISA for retirement, it shouldn't be used as a substitute for a pension, which will get you a much better deal in the long run. Instead, it's a nice added bonus.

As with any loan or savings account, the terms of the LISA could change before you turn 60.

How much can you save with a Lifetime ISA?

piggy bank wearing glasses

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How much you save with a LISA depends on how much you put into the account each year. There’s no minimum amount that you have to pay in monthly or annually, so you can pay in dribs and drabs if and when you can afford to.

There is a maximum amount, though: you can only deposit up to £4,000 a year into your LISA. With the annual 25% bonus from the government, you can earn up to an extra £1,000 in cash, bringing your annual savings to £5,000.

Don't forget that ISAs run according to the tax year (6th April to 5th April), regardless of when you open your account. If you open it in January, you have until 5th April that year to deposit up to £4,000 to secure that year's bonus.

Best case scenario: If you were to open your LISA on your 18th birthday and save the maximum amount of £4,000 each year, by the time you go to retire you’d have saved £132,000 and received an extra £33,000 from the government on top of that. That's a lot of free cash, and a total pot of £165,000 in today's money (not accounting for the added interest over time).

And just remember, the bonus you receive is only based on what you put in. It doesn't matter what the interest rate is on your cash LISA, or how much you make with a Stocks and Shares LISA, the government bonus will always be the same.

How do you get your Lifetime ISA bonus?

wolf of wall street throwing money

Credit: Paramount Pictures

The 25% bonus on your Lifetime ISA can be paid monthly or annually and you can earn interest on the total amount in your account. However, the interest earned does not count towards your £4,000, so you can't use it to earn more of a bonus.

And, even if the 25% bonus is paid monthly, that doesn't mean you need to make monthly deposits in order to receive it. If you'd rather just make a lump sum deposit once a year, you'll still earn 25% on whatever you pay in.

It's also worth noting that if you use the LISA to purchase a property, the funds will go straight from the bank to the solicitor handling the property purchase.

This means that although you’ll be able to see the bonuses come in and watch your money grow, you won't be able to get your hands on the cash as it will be passed between the banks and lawyers.

The only exceptions to this are if you choose to withdraw it early (incurring a penalty) or after your 60th birthday, in which case the money goes straight to you.

Early withdrawals and other Lifetime ISA risks

safety deposit

ISAs are a good way of keeping your money safe – particularly from yourself! There are always going to be certain risks involved, and although these shouldn't be a huge worry, they should still be taken into consideration.

If you change your mind about the bank or building society that holds your LISA, don't panic – you can easily transfer from one provider to another without losing any of your interest or bonuses (although some providers may charge a one-off admin fee for this).

However, if you decide you want your cash before you turn 60 and you don’t want to buy your first property with it, there's usually* a 25% fee on the total that you withdraw.

This works out as the entire 25% bonus you received from the government plus an extra 6.25% on top. This is because the 25% charge would be applied to the money you've saved after the government bonus has been added.

For example, imagine you've got £1,000 in your LISA and received a 25% bonus of £250. If you decide to withdraw early, you'll have to pay a 25% charge on the entire total of £1,250, which works out as £312.50. As a result, you'll only take home £937.50 instead of your original £1,000.

* For the period 6th March 2020 – 5th April 2021, the penalty has been reduced to 20% to help ease the financial strain caused by coronavirus. This 20% penalty is equivalent to the government bonus and not a penny more, so you'll recoup all of your original savings.

There are also additional risks associated with the two types of Lifetime ISA:

Cash LISA risks

This is most similar to a regular savings account, in that you choose how much you pay in and receive a pre-defined amount of tax-free interest on it.

The only risk involved in this option would be if the bank you have your LISA with goes bust, in which case you'll be protected for up to £85,000. While this sounds like a lot (and, to be fair, it is), if your LISA balance is above this amount, anything above £85,000 could be lost if the bank collapses.

Stocks and shares LISA risks

This version involves investing your LISA money directly into stocks and shares.

As is always the case with anything that relies on the stock market, this option involves more risk-taking but can see a higher return if your shares do well. Of course, if your investments perform badly, you could lose money.

There are also fees associated with stocks and shares LISAs, and these will eat into your savings (perhaps not a great deal, but it's still your money!).

Because of the uncertainty and risks involved, we'd always recommend that you carefully research and seek professional advice before investing this way.

How do you open a Lifetime ISA?

people signing documents

Opening an ISA is a pretty simple process, and it really shouldn't take you a great deal of time. That said, you may need some paperwork to hand.

Two things we can confirm you’ll need before you open a LISA are:

  • Your National Insurance number
  • As with all cash ISAs, you'll need proof that you haven’t opened any other ISA in the current tax year (otherwise you’ll have to wait until the following tax year to open a LISA).

Can your parents open a LISA on your behalf?

Your parents can guide you as much as is necessary, of course, but since ISAs are individual banking products you need to open the account yourself (armed with the above to get started).

However, your parents are allowed to 'gift' you money tax-free each year to pay into your Lifetime ISA, so remember to be nice!

Can you have more than one Lifetime ISA?

You can have more than one ISA at one time that you pay into each month and gain interest on.

You can also have more than one Lifetime ISA, but you can only pay into one each tax year (meaning you can't game the system to get double the bonus).

The maximum amount you're allowed to save in all your ISAs combined is £20,000 per year.

Which banks offer a Lifetime ISA?

Since the LISA was launched in April 2017, banks aren't exactly jumping at the chance to start offering them to the public – but these are the ones which are.

Remember to think carefully about whether you want a cash or stocks and shares LISA, and know what the differences are.

Best cash Lifetime ISAs

These are the cash Lifetime ISAs offering the best interest rates:

  1. Moneybox Lifetime ISA (1.1% incl. 12 month 0.6% bonus)

    moneybox logo

    Minimum investment: £1

    Interest paid: Monthly

    How to open/access: App.

    This LISA from Moneybox, an app-only option, offers the highest interest rate on the market (although the 1.1% rate will drop to 0.5% after a year). And, as if that weren't enough, it's just so damned user-friendly.

    The Moneybox app is super easy to use and opening a LISA takes just a few minutes, making it an ideal choice for someone who's still getting to grips with the ins and outs of their finances.

    Apply for this LISA »

  2. Nottingham Building Society Lifetime ISA (1.05%)

    nottingham building society logo

    Minimum investment: £10

    Interest paid: Annually

    How to open/access: Online.

    The Nottingham Building Society LISA currently pays close to the highest interest rate on the market, and unlike Moneybox, doesn't include a bonus in its rate – so, after a year, it won't drop by 0.5%. And, of course, still comes with the 25% government bonus.

    That said, it's worth noting that, unlike some LISAs which allow transfers in from all kinds of ISA, the Nottingham account only allows you to do so from other LISA accounts – and only if you're aged 18–39.

    Apply for this LISA »

  3. Paragon Lifetime ISA (0.75%)

    paragon bank

    Minimum investment: £1

    Interest paid: Annually

    How to open/access: Open online, manage online, by phone or post.

    Offering a slightly lower interest rate than Moneybox and the Nottingham Building Society, Paragon's Lifetime ISA is still a long way ahead of most other cash LISAs on the market (the majority of which offer interest rates below 0.5%).

    And, unlike Moneybox, Paragon's Lifetime ISA doesn't include a bonus period – so, in theory, it will offer a better rate of interest after 12 months.

    What's more, if you'd rather not access your LISA online, Paragon is the only provider in the top three to let you manage your funds by phone or post too.

    Apply for this LISA »

 

Best stocks and shares Lifetime ISAs

WARNING: As with all investing, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Lifetime ISA rules apply.

The market for stocks and shares LISAs is a little bigger than the cash equivalent, although it's still relatively slim pickings.

How much you can ultimately make from these LISAs depends on where you choose to invest your cash.

We're not here to tell you where and how much to invest, but what we can do is outline which LISAs offer a greater range of funds for you to invest in, and which will completely manage your investments for you.

With that in mind, here are the best stocks and shares LISAs:

  1. AJ Bell Youinvest stocks and shares Lifetime ISA

    aj bell you invest logo

    Minimum investment: £500 lump sum or £25/month

    Annual fees: 0.25% base charge, additional charges on transactions.

    AJ Bell's Lifetime ISA offers a massive range of investment options, including shares, funds and exchange-traded funds.

    Of course, all of this requires knowledge (and, preferably, experience) of what it is you're investing in. If you're more of a rookie, AJ Bell also offers complete portfolios for you to invest in, with varying levels of risk.

    It's also worth taking note of the potentially hefty transfer fees attached to this LISA. At £25 per holding when you transfer to a new LISA provider, this will be a serious sting in the tail for anyone who's invested in a wide range of funds.

    Apply for this LISA »

  2. Hargreaves Lansdown stocks and shares Lifetime ISA

    Hargreaves Landown logo

    Minimum investment: £100 lump sum or £25/month

    Annual fees: 0.45% base charge, additional charges on transactions.

    Hargreaves Lansdown has thousands of investment options to choose from (more than 2,500!).

    While this sounds great, it also means that it's best for people with knowledge of investment who want to be more hands-on when deciding where to invest.

    But that's not to say you'll be left in the dark – their financial advisors can help out if there's anything you're unsure on.

    Apply for this LISA* »

  3. Nutmeg stocks and shares Lifetime ISA

    Nutmeg

    Minimum investment: £100 lump sum

    Annual fees: 0.45% for fixed portfolio, 0.75% for fully managed or socially responsible portfolio.

    Nutmeg is an app/robo-advisor which takes away the hassle of deciding where to invest and makes your investments for you based on how much risk you want to go for.

    They'll ask you a few questions which will determine whether you want to play it safe or go for some riskier options, then one of their investment professionals will take the reigns.

    They offer three main LISA options. With a fully managed portfolio, the team will regularly monitor your investment and make strategic decisions to protect against losses. They also now offer socially responsible portfolios, which are essentially the same but with a focus on investing in socially responsible ways.

    The fixed allocation portfolio is a cheaper option (with a 0.45% fee instead of 0.75%) and is designed to perform without intervention.

    Apply for this LISA* »

  4. Moneybox stocks and shares Lifetime ISA

    moneybox logo

    Minimum investment: £1

    Annual fees: £1 per month (free for the first three months), plus 0.45% per year, plus an additional 0.12% – 0.3% in fund manager charges.

    As we explained earlier, the Moneybox app is really easy to use, making it a great shout for those who are new to the investment scene.

    They simply have three investment options – Cautious, Balanced or Adventurous – and you choose one based on how much risk you're willing to take.

    But our favourite Moneybox feature is the ability to automatically invest your 'spare change'. Simply hook up your debit/credit card to the app and, for every purchase you make, they'll round it up to the nearest pound and invest the difference.

    So, for example, if you spend £2.20 on a sandwich, they'll round it up to £3 and automatically invest the 80p for you.

    With their Cautious option, a £7,000 investment over the course of 10 years has been known to make around £963 – although past performance is not always a reliable guide for future performance.

    Apply for this LISA »

Help to Buy ISA vs Lifetime ISA

Happy woman in new home

Credit: WAYHOME studio – Shutterstock

The Help to Buy (HTB) ISA is very similar to the LISA – so much so that it has been speculated that the HTB might've been launched as a stepping stone that the government used to test the waters before announcing the Lifetime ISA.

Indeed, in the time since the Lifetime ISA was launched, the Help to Buy ISA has closed to new customers.

However, if you have a HTB and are considering switching to a LISA, it's worth getting clued up on the similarities and differences between the two.

Help to Buy and Lifetime ISA differences

These are the most important differences between the Help to Buy and Lifetime ISAs:

  • The Help to Buy ISA can only be used to buy your first property, whereas the LISA can be for first-time buyers or retirement funds.
  • You can save more with a LISA (£4,000 per year compared with HTB's £2,400 per year).
  • Help to Buy assumes you'll be saving more short term and therefore has a maximum bonus of £3,000, whereas the LISA can also be used for retirement so can accumulate up to £33,000.
  • The bonus isn't applied until you buy a home with the HTB, so you never earn interest on the bonus itself (unlike the LISA).
  • Because the bonus isn't applied until after the sale is made, the HTB also can't be used towards a deposit on a property, whereas the LISA can.
  • You can buy a house with the money you’ve saved in an HTB ISA once you've saved £1,600 (which can potentially be achieved within three months), whereas you need to wait a year before you can spend LISA savings.
  • If you're looking to buy in London, both the HTB and LISA can be used on properties up to a maximum value of £450,000. In fact, the LISA can be used to buy a property up to that value anywhere in the UK, but with HTB the cap drops to £250,000 outside of London.
  • HTB ISAs were available to any first-time buyer over 16, whereas LISAs are for 18+.
  • HTB ISAs are cash-only, whereas LISAs offer both cash and stocks and share ISAs.

 

Wondering how you'll be able to fill your Lifetime ISA with cash? Check out our list of expensive habits to give up which could save you £100s (if not more!) each year.

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