Lifetime ISA guide
A Lifetime ISA could get you up £1,000s of free cash to help you buy your first home - so if you don't know what it is, now's the time to get clued up.
Our survey revealed that as few as 1 in 10 students have even heard of the government's Lifetime ISA (LISA) scheme. 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 it could be the only hope for many young people trying to scrape enough money together to get on the property ladder.
We know what you're probably thinking: How can I even be contemplating putting money away for a house at a time when I can barely afford to feed myself?
We completely get it. However, the Lifetime ISA really is an opportunity to blag some free money from the government (think of it as a post-student loan olive branch), so it's definitely something worth thinking about while the option is available.
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 so you can save as little or as much as you like. So how do they work?
What’s on this page?
- Lifetime ISA: In a nutshell
- What is a Lifetime ISA and how does it work?
- Are Lifetime ISAs really relevant for students?
- How can you spend your LISA?
- How much can you save with a Lifetime ISA?
- How is the bonus paid?
- Will your money be safe?
- How do I go about opening a Lifetime ISA?
- Which banks are offering Lifetime ISAs?
- Can you withdraw money from a LISA?
- Are there any alternatives?
Lifetime ISA: In a nutshell
We know this stuff can get confusing and the finer details can be a lot to take in.
For those of you who just don’t have the time to read about the LISA in detail, but are interested in knowing what the terms are, here's a quick digest of all the main details:
- You can pay a max of £4,000 into your Lifetime ISA each year
- The government will then give you a bonus of 25% of what you save (so a max of £1,000/year)
- The earliest you can use your LISA fund is one year after opening it
- You’re able to keep getting the 25% bonus on savings each year up to the age of 50
- You can’t use the money in your LISA until you use it to either buy your first home or on your 60th birthday
- The maximum house value you can put the LISA towards is £450,000 (on a property anywhere in the UK)
- You can combine your LISA with a partner to buy a house (who can also use their own LISA)
- You can’t use the LISA to buy a property to rent out – it needs to be for you to live in yourself
- 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
- You can transfer any Help to Buy funds into your LISA
- 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 the Lifetime ISA and how does it work?
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 difference between a regular savings account and an ISA was that you’d be required to pay tax on the interest you receive on anything saved in a regular savings account each year, whereas ISAs were accounts that were exempt from tax (provided that you stick to the rules – more on that later).
However, since April 2019 basic-rate tax payers (that's anyone earning less than £50,000 per year) have been able to earn up to £1,000 interest in any savings account without having to pay any tax on it.
So does this mean that ISAs are now defunct? Enter, the Lifetime ISA!
Now that UK tax payers can save tax-free in any savings account, the Lifetime ISA is stepping the game up by offering a bit more bang for your buck.
With the LISA, the government is offering to help young people get on the property ladder by contributing an extra 25% on top of what they save to be put towards buying their first home. You can save a max of £4,000 per year (meaning you'll receive up to an additional £1k per year in free dosh from the state).
It's also worth knowing that, unlike the Help to Buy ISA (which is similar to the LISA in a lot of respects but doesn't offer quite as good a deal) you can use the cash you save in a LISA towards an initial housing deposit. Help to Buy ISAs can only be used as part of a mortgage deposit because the bonus can't be used until the sale has been completed.
If you're not interested in using the LISA to buy a property, it can also be used for thinking super long term as a retirement fund (more on that below).
Be warned though, one major drawback of the Lifetime ISA is that if you choose to withdraw your money early you will lose the entire 25% state bonus and have to pay a 6.25% fine.
Are Lifetime ISAs really relevant for students?
Lifetime ISAs are a great saving option for anyone who is thinking about securing their future, as this is often a big worry for students and grads.
Preparing yourself for buying your first home or thinking long term about retirement might sound a little crazy to you right now, but it’s worth remembering that saving takes time, so 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 much student loan you're eligible for or have any impact on student loan repayments.
Some scenarios that might suggest now is the time to open your LISA:
- 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 student 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 ten years
- You’d like to become self-employed after uni, so might not have a pension scheme.
Spending your Lifetime ISA funds
Saving towards your first property
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…
- Looking to buy a property in the UK
- Don’t already own a property or have had a share of a property (anywhere in the world)
- Are planning to buy a property to live in yourself rather than rent out to others
- 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.
Note that 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
If you start out saving for a property but then decide you don’t want to use the LISA cash to buy your first home for whatever reason, you can avoid losing your bonus money by continuing the LISA as a means for saving 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 - but it's a nice added bonus.
How much can you save with a Lifetime ISA?
How much you save depends on how much you put into the account each month. There’s no minimum amount that you have to pay in monthly, so you can pay in whatever dribs and drabs if and when you can afford to – you don’t need to pay it in a lump sum each month.
You’ll be able to save up to £4,000 a year with your LISA (meaning you can get up to £1,000 from the government as your yearly bonus on top of that) in cash, but also stocks and shares too.
Don't forget that ISAs run according to the tax year (April to April), regardless of when you open your account. If you open it in January, you have until April to deposit up to £4,000 a 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 £128,000 and received an extra £32,000 from the government on top of that. That's a lot of free cash!
It’s also worth knowing that 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 LISA, but you can only pay in to one each tax year.
How is the bonus paid to you?
The 25% bonus on your Lifetime ISA will be paid monthly 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.
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 watch the bonuses come in and see 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 (unless you choose to withdraw it for the 25% fee or after your 60th birthday, in which case the money goes straight to you).
Will your money be safe in a Lifetime ISA?
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.
One risk worth knowing is that, if you decide to withdraw your money to spend on something that's not your first property, you will lose any 25% bonus that the government has added to your savings and will also have to pay a 6.25% fine on top of that – ouch!
This means that if you decide not to buy a property, you’ll need to leave your cash in the LISA until your 60th birthday to avoid the fine (but you don’t have to continue paying more cash into it each month).
Even if you just make a partial withdrawal, without taking the full amount, you'll still incur a 25% deduction on the amount withdrawn.
There are two different types of Lifetime ISAs to choose from:
- Cash LISA: This is most similar to a regular savings account – 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
- Shares LISA: This version involves you 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. Because of the uncertainty and risks involved, always research carefully and seek professional advice before investing this way.
How do you open a Lifetime ISA?
As the LISA hasn't been around for very long, only a small handful of banks are offering them. But as soon as more banks get on board, we'll let you know. Sign up to our newsletter and we’ll keep you in the loop on that one!
Two things we can confirm you’ll need before you open a LISA are:
- Your national insurance number
- 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).
Which banks are offering Lifetime ISAs?
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.
Newcastle Building Society
Best for: Largest interest rate and a risk-free bonus
Fees: None (Other than the standard charge for withdrawing early)
Minimum investment: £1
Newcastle Building Society are the most recent cash LISA provider to enter the market.
It comes with the highest interest rate at 1.1%. This does seem low but it obviously comes with the 25% bonus.
It's worth noting that you cannot transfer a Help to Buy ISA into this LISA.
Skipton Building Society
Best for: Transferring in a HTB ISA and a risk-free bonus
Fees: None (Other than the standard charge for withdrawing early)
Minimum investment: £1
Skipton Building Society was the first (and only) provider of the Cash LISA.
A Cash LISA is the safest option to go for, as it works essentially the same as a regular savings account.
Although interest rates are below average at just 1%, you'll still benefit from the 25% bonus from the government.
Also don't forget this interest rate is variable, so it could go up or down over time.
To date, there are just five providers offering stocks and shares LISAs (AJ Bell, Nutmeg, Hargreaves Lansdown, Moneybox and One Family).
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 to invest, but here's more information on some of the providers of stocks and shares LISAs...
Hargreaves Landown have thousands of investment options to choose from - more than 2,500 to be precise.
While this sounds great, it also means it's best for people with knowledge of investment and who want to be more hands on when deciding where to invest.
However, there is the option to allow a fund manager to make these decisions for you.
Their investments range include shares, funds, investment trusts and exchange-traded funds - basically, a diverse portfolio which spreads out the risk.
Nutmeg 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 two main LISA options. With a Fully Managed Portfolio the team will regularly monitor your investment and make strategic decisions to protect against losses.
The Fixed Allocation Portfolio is a cheaper option (with a 0.45% fee instead of 0.75%) and is designed to perform without intervention.
Best for: Beginner investors and investing small amounts of money
Fees: £1 a month subscription fee (free for first three months), annual 0.45% platform fee and on average 0.23% fund provider fee
Minimum investment: £1
Moneybox is an app that makes the investment process as simple as possible, so for beginners this is a great shout.
They simply have three investment options - Cautious, Balanced or Adventurous - and you choose one based on how much risk you're willing to, well, risk.
They also have a great feature where they automatically invest your 'spare change'. You hook up your debit/credit card, 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.
Can you withdraw money from a Lifetime ISA?
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.
If you decide that you don’t want to spend your LISA savings on a new property, you can avoid losing your bonus by continuing the ISA as a retirement fund.
However, if you decide you want your cash before you turn 60 and you don’t want to buy your first property with it, you'll be charged 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 so 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.
Are there any alternatives to the Lifetime ISA?
The Help to Buy ISA is very similar to the LISA – so much so that it has been speculated that the Help to Buy might've been launched as a stepping stone that the government used to test the waters before announcing the Lifetime ISA.
The most notable differences between the two ISAs are as follows:
- The Help to Buy ISA (HTB) 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/year compared with HTB’s £2,400/year)
- HTB has a maximum bonus of £3,000 because it assumes you’ll be saving more short term in the hope of buying your first home, whereas the LISA can also be used for retirement so can accumulate up to £32,000
- 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 a 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
- The maximum property price you’re able to aim for is the same for both ISAs if you’re looking to buy in London (£450,000) but if you choose to buy outside of London this drops to £250,000 with the HTB ISA
- The HTB ISA is available to any first-time buyer over 16, whereas LISAs are for 18+
- HTB ISAs are cash-only, whereas LISAs offer both cash and share ISAs.
*please be aware that this is an affiliated link. If you use this link it may result in Save the Student receiving a payment following you taking action (such as a purchase or registration) on the external website. This helps keep Save the Student free and is at no extra cost or negative impact to you.