What Is A Lifetime ISA?

A Lifetime ISA — also known as a LISA, or Lifetime Individual Savings Account — is a type of savings account available in the UK. It’s designed to help people save for one of two specific purposes:

• Buying your first home.
• Saving for retirement.

Here, you’ll learn all you need to know about Lifetime ISAs, including how they work, who can open one, and the limitations on this type of savings account.

How does a Lifetime ISA work?

The clue’s in the name for a Lifetime ISA — it’s designed to be used as a long-term savings account, rather than an easy access pot you can dip into whenever you need to.

You can save up to £4,000 each tax year in a Lifetime ISA. The government adds 25% of whatever you save each year. So if you pay in the maximum £4,000 in a single year, you’ll get £1,000. You’ll also earn tax-free interest on your savings.

But there’s a catch: any money you save in a Lifetime ISA must be used to buy your first home or pay for your retirement.

A Lifetime ISA works like this:

• Check you’re eligible. You need to be a UK resident aged 18-39 to open a Lifetime ISA.
• Choose a bank, building society, or investment company that offers Lifetime ISAs. If you’re not sure where you want to save yet, see our list of ethical UK banks for inspiration.
• Apply for a Lifetime ISA online. The bank will review your application and approve you if you meet the criteria.
• Pay up to £4,000 into your LISA each tax year. Tax years run from April to April in the UK.
• Contribute to your Lifetime ISA until you’re 50. Your first payment must be made before you’re 40.
• Withdraw the cash when you’re ready to buy a house or when you turn 60. If you take out the money at any other time, you’ll pay a penalty. You can also withdraw your money penalty-free if you’re terminally ill.

Any money you pay into your LISA counts towards your total annual ISA contribution limit of £20,000.

Using your Lifetime ISA to buy a house

You can use the savings in your Lifetime ISA to buy your first home. You can’t use it to pay for subsequent or second homes.

You also need to meet certain other criteria:

• The home you’re buying must cost £450,000 or less.
• You must buy the property at least 12 months after making your first LISA payment.
• You must use a conveyancer or solicitor to complete your house purchase.
• You’ll need to buy the home with a mortgage, rather than paying in cash.

If you’re buying with another person, you can both use your LISA contributions for the same home. But you must both be first-time buyers, and meet all the conditions above.

Help To Buy ISA vs Lifetime ISA

Help To Buy ISAs were a type of ISA designed to help you save specifically for your first home. You can’t open a Help To Buy ISA any more, but you may still use one if you opened it before December 2019.

You can transfer savings from a Help To Buy ISA to a Lifetime ISA without paying any fees. But if you transfer LISA savings to a Help To Buy ISA, you’ll pay a 25% withdrawal fee.

Using your Lifetime ISA for retirement

If you’ve already bought your first home, or don’t intend to buy a house, you can still use a Lifetime ISA to save for retirement.

In this case, you can withdraw the money you’ve saved from your 60th birthday onwards.

You can also withdraw the money if you’re diagnosed with a terminal illness that gives you less than 12 months to live.

Lifetime ISA vs pensions

Both LISAs and pensions are designed to help you save for later life. But Lifetime ISAs work the opposite way to pensions.

When you pay into a pension, you’re not taxed on the money you contribute. But when you withdraw your pension during retirement, you will be taxed.

When you pay into a Lifetime ISA, you’re contributing money you’ve already paid tax on. But you won’t pay any tax when you withdraw money from your Lifetime ISA in line with government rules.

Withdrawing money from your Lifetime ISA

You won’t pay any tax or fees when you withdraw money from your Lifetime ISA, as long as you use the funds to pay for your first home or retirement.

However, if you withdraw money at any other time, you’ll pay a 25% penalty on the amount you withdraw. That means you’ll ultimately lose any government contributions you’ve accumulated.

That’s why you need to use a solicitor or conveyancer to buy your first home. The cash is transferred from your Lifetime ISA directly to your solicitor, ensuring it can only be used for the house purchase.

Can I open a Lifetime ISA?

You can open a Lifetime ISA if:

• You’re aged 18-39 — you can open a LISA up to the day before your 40th birthday.
• You live in the UK.
• You’re the spouse or civil partner of someone who lives in the UK.

Is a Lifetime ISA right for you?

If you’re already saving to buy your first home, it may be worth opening a Lifetime ISA. You’ll get a 25% cash bonus from the government for each contribution you make up to £4,000 each tax year.

However, a Lifetime ISA isn’t always the best choice for everyone. Consider the decision carefully if you:

• Have a lot of debt — Paying off debt is usually more worthwhile than contributing to a savings account.
• Need instant access to savings — If you have a small amount saved up in an emergency fund, you may be better off keeping this in an easy access savings account in the short-term.
• Pay the higher rate of tax and you’re saving for retirement — Contributing to a private pension can help you save more in tax than paying into a LISA.

Join a money club to build your LISA pot

Retirement and mortgage deposits are expensive — so it may be unrealistic to save for these in your money club.

But you can use your money club to build up contributions for your LISA. This can break down your saving goals into more manageable chunks, helping you stay on track. You can use payouts from your money club and transfer into your LISA.

Find out more about setting up a money club in the UK, and how Bloom helps you manage your contributions.