A Lifetime ISA known as a LISA can help you save up to buy your first home or towards a comfortable retirement. The massive advantage is a 25% Government bonus paid on top of your savings. Here we break down how you can reach your saving goals with a Lifetime ISA.
Reach Your Saving Goals With a Lifetime ISA
A Lifetime ISA is just one type of ISA that is available to help you reach your savings goals. ISA stands for Individual Savings Account. The main advantage of an ISA over other types of savings accounts is that it offers tax-free interest. Other savings accounts require you to pay tax on any interest earned above £1,000 for basic rate taxpayers. For higher rate and additional rate taxpayers, the allowance is only £500. This rule does not apply to money saved in an ISA.
ISA Allowance
Despite this advantage, there is still a limit to how much you can save tax-free in an ISA. This is known as an ISA allowance, which is £20,000 for the tax year 2025/26.
These are the different types of ISA:
- Cash ISA
- Stocks and shares ISA
- Junior ISA
- Lifetime ISA
- Innovative Finance ISA
You can open several each year depending on your needs however, your individual £20,000 allowance is split across them. Usually, if you withdraw money from your ISA, this cannot be paid back without counting it as ‘new’ money for the purposes of the £20,000 allowance. If you open a new ISA and want to transfer funds from an existing ISA and avoid this charge, you will need to request an ISA transfer with the bank instead of withdrawing the money and paying it in again.
What is a Lifetime ISA?
The main advantage of opening a LISA is the government bonus paid to you with this type of savings account. The maximum annual limit for a Lifetime ISA is £4000, which is included in your £20,000 ISA annual limit. To take advantage of this, you can break this down to a maximum of £4000 to deposit into your LISA and up £16,000 into the other types of ISA you hold.
What is a LISA used for?
LISAs were introduced in 2016 to help people save towards their own retirement funds and for first-time buyers. This means there are some restrictions on who can open a LISA and for what purposes the money saved can be used for. If eligible, you can reach your saving goals with a Lifetime ISA, which offers you all the usual tax benefits of a standard ISA, but with an added government bonus of 25% on your savings.
Who Can Open a LISA?
A Lifetime ISA is available to people aged between 18 and 39 (and 364 days) and residents of the UK. Unlike other types of ISA, you are only permitted to have one LISA. You will then 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 after the bonuses stop. So, if you are able to open a LISA when you turn 18 and you pay in the maximum allowance every year until you turn 50 then you will accrue £33,000 in Government bonuses, plus £128,000 in your own savings plus interest.
Choosing a Provider
If eligible, you can transfer your account between providers. So, don’t be too shy to shop around and get yourself the best interest rate each year. What is important is that you 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, as long as you follow the bank’s process. It takes a little longer than physically putting cash into your account, but for healthy savings, plus bonuses and interest it’s definitely worth the wait.
Is My Money Easy to Access?
There are some strict criteria for using the money saved in a LISA. You can only access your money if you are a first-time buyer and using the money saved up for your deposit or you have turned 60. This means that if you are not buying a house, you cannot access your money until after you are 60 years old. This is what makes the LISA a great retirement investment plan. Your savings will continue to earn interest for ten years after your government deposits stop, which will accumulate a decent-sized lump sum tax-free, which becomes available to you on your 60th birthday. Many self-employed people choose LISAs as part of their retirement plan, as the free bonus money makes up for not receiving pension top-ups that employees receive as part of their PAYE earnings.
What if I Need the Money in an Emergency?
If you need to access your LISA savings sooner, you will be subject to a pricey penalty of 25%. For example, if you pay the allowance of £4,000 into your LISA and receive a £1,000 bonus, if you then withdraw your money within the first 12 months of the account being opened or for something other than turning 60, or for your first home deposit, you would be charged a 25% penalty of £1,250 so you receive £3,750 back, which is in fact £250 less than you paid in from your own money. You can only appeal this under extreme circumstances, such a diagnosis of terminal illness with less than 12 months to live. If in any doubt there are other types of ISA and ways to save.
When You Shouldn’t Open a LISA
One last consideration is that savings in a LISA also count as capital for anyone applying for means-tested benefits.
How the Gain From the 25% Bonus
For those who are eligible, the LISA offers a worthy bonus. The Government pays 25% on top of your savings, up to £1,000 every year. This bonus is added at regular intervals, often monthly, depending on the terms of your LISA provider. You’ll gain interest on your savings as well as receive Government bonuses.
Buying Your First House With a LISA
Like the old Help to Buy ISAs, there are some restrictions 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
When you meet these criteria and are ready to use your funds, you must use a conveyancing solicitor to act on your behalf to access the money.
How to Maximise Your Saving Potential
In a Couple
If you are buying your first home with someone else, they can also have a LISA, as long as they have not owned property before. This means you can make the most of the 25% bonus by getting up to £2,000 a year extra between you to put towards your deposit.
The best way to reach your saving goals with a Lifetime ISA is to leave it alone to attract savings until you’re 60, which is a reliable way to save for a comfortable retirement. For example, you can pay the full £4,000 a year from 18 to 50. You will receive £1,000 a year in Government bonuses.
Saving for Retirement
That adds up to £160,000 (32 years x £4000 plus £32,000 in Government bonuses) – before you even add the interest that this will earn. Remember, you can shop around for the best provider deals, year to year, as long as you use the bank’s approved process to make transfers in order to protect your savings allowance.
If you 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. Following this, your money sits there for another ten years, accruing interest. If you assume the same 2% interest. When your LISA becomes available to you at the age of 60, your account will hold nearly £274,000. Which is more than double your initial investment. What’s more, 2% interest is a conservative estimate. There are higher-risk equities LISA providers, which could gain you even more interest, up to 6% or 7%.
Will Any LISA Do?
There are a variety of LISAs available depending on your circumstances and expectations.
Cash LISA
The most basic and safest way to reach your saving goals with a Lifetime ISA is with a Cash LISA. Contributions to a Cash LISA are held in cash and earn interest just like in a usual savings account, but with the added benefits of being tax-free and qualifying you for the 25% Government bonus. If you plan to buy a house with your LISA savings in the next five to ten years, this will likely be your best and easiest option, including couples looking to buy their first home together. This way, you can both get a Lifetime ISA and save a maximum of £8000 and gain an extra £2000 bonus towards your deposit every year. So, in five years, you’ll have £40,000, plus any additional interest, to put down in a deposit.
Stocks and Shares LISA
Another option is LISA contributions can be made by investments in stocks and shares or investment funds. Known as a Stocks and Shares LISA, or an Equities LISA. An Investment Lifetime type ISA is riskier than a cash LISA because your investments can go down as well as up. The recommendation is to hold them for a minimum of five years to allow these fluctuations to level out. That said, you can choose different levels of investment risk. A cautious approach is better if you are closer to taking your money out of the account. If you are planning for long-term retirement savings with your LISA, an equities LISA is more likely to give you the most significant returns on your money. The longer you plan to save, the more risk you can potentially take to gain a higher reward. If you choose this option, it pays not to monitor stock market fluctuations too frequently since the stock market fluctuates a lot. Checking every few months will show you longer-term trends, and if you are unhappy with how your LISA is performing, you can re-assign your funds.
Invest with Caution
A word of caution from the Financial Conduct Authority. Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at any time. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance.
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