What is a LISA and should I get one?

Annie 7th Aug 2024 One Comment

Reading Time: 7 minutes

Updated 7th August 2024

A Lifetime ISA (LISA) can help you buy your first home or save for retirement. A whopping 25% Government bonus gets paid on your savings – who can say no to free money?! There are, of course, some caveats. Here, we break down the LISA rules and whether you should consider opening one.

ISA basics
What is a Lifetime ISA?
Who can open a LISA?
When can I access my money?
How the 25% bonus works
Types of LISA
More reading

ISA Basics

A Lifetime ISA is just one of the ISA options available. An ISA is an Individual Savings Account. The main difference between an ISA and any other savings account is that it offers tax-free interest. For other savings accounts, you’ll pay tax on any interest earned above £1,000 if you’re a basic rate tax payer, £500 for higher rate, and any interest for additional rate earners. That doesn’t apply to money in an ISA.

Yet, you do have a limit to how much you can put into an ISA. This is known as an ISA allowance, which for the 2024/25 tax year is £20,000.

There are different types of ISA, too:

You can open several each year, but your £20,000 allowance is split across them. If you take money out of your ISA, this often can’t be paid back in without counting as ‘new’ money for purposes of the £20,000 allowance. So, if you open a new ISA and want to transfer funds from and old one, you need to request an ISA transfer with the bank, instead of withdrawing the money and paying it in again.

What is a Lifetime ISA?

What does a Lifetime ISA offer that the regular ISA doesn’t? The answer is, free money from the Government!

A LISA is a long-term Independent Savings Account that was introduced in 2016. A Lifetime ISA offers you all the usual tax benefits of your standard ISA, but with an added government boost of 25% on your savings.

Lifetime ISAs were introduced to help those saving for their retirement and first-time buyers. This means there are some restrictions on who can have an account and what you can use the money for.

The maximum annual limit for a Lifetime ISA is £4000. This is included in your £20,000 ISA limit for the year, so you can break it down to a maximum of £4000 into your LISA and £16,000 to the other ISAs you hold.

Who Can Open a LISA?

To open a Lifetime ISA, you need to be aged between 18 and 39 (and 364 days) and be a UK resident. Unlike other ISA types, you can only have one LISA.

You will qualify for the Government contributions on your LISA until you turn 50, at which time you can no longer pay into the account, and the bonuses stop too.

Your LISA will stay open and you will continue to gain interest on your money long after the bonuses stop. So, if you are lucky enough to open a LISA when you turn 18 and pay in the maximum every year until you turn 50 then you will have amassed £33,000 in Government bonuses, plus £128,000 in your own savings – and that’s before interest!

Choosing a Provider

If you’re within the 18-39 age bracket, you can transfer your account between providers. So, don’t be afraid to shop around and get yourself the best interest rate each year.

WHATEVER you do though, you must transfer your Lifetime ISA through the bank’s transfer system. If you withdraw the cash then put it into a new LISA, you’ll lose the Government bonus on that cash AND lose out on your personal allowance for the year.

Transfers are really simple to do, so make sure you go through the process! It takes a little longer than physically putting cash into your account, but it’s worth the wait.

When Can I Access My Money?

There is a pretty hefty catch to all this free money.

You can ONLY access your money if:

You’re a first-time buyer and using your savings and the 25% bonus for your deposit, or
You’ve turned 60

So, if you’re not buying a house, you can’t touch your money until you’re 60 years old. That’s what makes it a great retirement investment plan: your savings will accrue interest for TEN YEARS after your deposits stop, meaning a nice hefty tax-free lump sum available for your 60th birthday! Many self-employed people are choosing LISAs as part of their retirement plan, as the free bonus money makes up for not receiving pension top-ups as PAYE workers receive.

What if I need the money for something else?

If you need your LISA savings sooner rather than later, you’re facing a hefty penalty of 25%. So, if you paid in £4,000 and had the £1,000 bonus, but withdraw either in the first 12 months of the account or for something other than turning 60 or your first home, you would receive £3,750 back – which is £250 less than you paid in.

You can only access without a penalty in extreme circumstances, such as being diagnosed as terminally ill with less than 12 months to live.

Savings in a LISA also counts as capital for anyone applying for means-tested benefits, so keep that in mind, too.

How the 25% Bonus Works

The Government pays 25% of your savings, up to £1,000 each year. This bonus is added at regular intervals – usually monthly – depending on the terms of the LISA.

You’ll gain interest on your savings AND the money from the Government bonuses.

When You Buy Your First House

Like the old Help to Buy ISAs, there are some rules to using a LISA for your first home.

You must:

Buy a home worth less than £450,000
Be a first-time property owner
Have held the LISA for at least 12 months prior
Be buying your home with a mortgage

If you’re buying with someone else, they can also have a LISA (if they haven’t owned property before, either). That means you can make the most of the 25% bonus – getting up to £2,000 a year extra between you to put towards your deposit.

When you’re ready to use your funds, you must use a conveyancing solicitor to act on your behalf to access the money.

When You Turn 60

If you’re not touching your LISA until you’re 60, you could build a lovely nest egg!

Let’s say you pay in the full £4,000 a year from the age of 18 to 50. You’ll also get £1,000 a year in Government bonuses. So, that’s a lump sum of £160,000 (32 years x £4000 and £32,000 in Government bonuses) – before you consider interest!

Let’s assume an average interest rate of 2% each year. By the end of your 50th year, you’ll have £224,242 sitting in your account – from your initial investment of £128,000.

AND THEN

Your money sits there for another ten years! Let’s assume the same 2% interest. When you can finally access your money at the age of 60, your account will hold nearly £274,000. That’s more than DOUBLE your initial investment.

And 2% interest is a conservative estimate! If you choose a higher-risk equities LISA, you could gain even more interest – maybe even 6% or 7%.

Types of LISA

So, what type of LISA is best for you?

Cash LISA

The cash Lifetime ISA is the more basic and safest way to save through a LISA. Contributions to these are held in cash and earn interest just like in a normal savings account, but with the added benefits of being tax-free and qualifying you for the 25% Government bonus.

If you’re planning to buy a house with your LISA savings in the next five to ten years, this is likely to be the best option. Remember to shop around each year to see if you can transfer your LISA to a provider offering a higher interest rate.

Couples looking to buy their first home together can both get a Lifetime ISA and together save a maximum of £8000 between you and gain an extra £2000 bonus towards your deposit every year. So, in five years, you’ll have £40,000 to put on a deposit (not counting additional interest!).

Stocks and Shares LISA

Alternatively, LISA contributions can be made by investments in stocks and shares or investment funds. This is known as a Stocks and Shares LISA, or an Equities LISA.

Investment Lifetime ISAs carry more risk than a cash LISA as your investments can go down as well as up, and it is recommended to hold them for a minimum of five years to let them even out.

You can choose different levels of investment risk. A cautious approach is better the closer you are to taking your money out of the account. The longer you plan to save, the more risk you can take (and potentially gain a higher reward).

The stock market fluctuates a lot, so small blips are worrying if you keep looking! Checking every few months will show you longer trends – and if you’re unhappy with how your LISA is performing, you can re-assign your funds.

If you’ve got long-term retirement plans for your LISA savings, an equities LISA is likely to give you the best returns on your money. Try not to watch the account closely week-to-week: instead, check every few months that the investments are going well.

What is a LISA and should I get one?

ISA Basics

What is a Lifetime ISA?