How much can I contribute to a Lifetime ISA?

The maximum contribution to a Lifetime ISA is £4,000 per tax year, and the government adds a 25% bonus on contributions, up to £1,000 annually.

Can I withdraw money from a Lifetime ISA before age 60?

Yes, you can withdraw funds for a first-time home purchase, but other withdrawals before age 60 incur a 25% penalty. The penalty means you lose some of your original savings and the government bonus.

What is the penalty for early withdrawals from a Lifetime ISA?

If you withdraw money for any reason other than buying your first home before age 60, you will be subject to a 25% penalty, which includes part of your original savings and the government bonus.

Can I use a Lifetime ISA to buy a property?

Yes, you can use a Lifetime ISA to buy your first home, provided the property value does not exceed £450,000 and the account has been open for at least 12 months.

What are the benefits of a Lifetime ISA for retirement savings?

If you don't use your LISA for a first-time home purchase, you can access the funds tax-free from age 60, including the government bonus, making it a useful retirement savings tool alongside a pension.

OPTIMLY Guides | Lifetime ISA Guide

Lifetime ISAs

Overview

Good for:

Tax-free saving for first-time buyers

Annual government bonus of up to £1,000

Retirement savings with tax-free growth

Keep in mind:

Withdrawal restrictions may apply

Can only contribute up to £4,000 per year

Stocks & shares LISA carries investment risk

Lifetime ISAs (LISAs) were introduced in 2017 as a government-backed way to help individuals save for their first home or retirement.

This guide will explore how a LISA works, including contribution limits, the government bonus, and how to use it for either buying your first home or for retirement savings.

1. What is an Lifetime ISA?

A Lifetime ISA (LISA) is a type of Individual Savings Account (ISA) designed specifically to help individuals save for their first home or for retirement. It offers tax-free savings with the added bonus of government contributions, making it an attractive option for those with long-term savings goals.

Lifetime ISAs come in two forms:

Cash Lifetime ISA: - A low-risk option where you earn tax-free interest on your savings. This is ideal for those looking for stable returns without investment risks.
Stocks & shares Lifetime ISA: - Invest in the stock market for potential growth. While this option offers the potential for higher returns, it also carries the risk of your investments falling in value.

2. LISA allowance

The Lifetime ISA has a specific contribution limit that fits within the overall ISA allowance. Here's what you need to know about making the most of your LISA contributions:

Annual LISA Limit: - You can contribute up to £4,000 per tax year into a Lifetime ISA. This amount is included within your overall annual ISA allowance of £20,000.
Overall ISA Allowance: - The total ISA allowance for the 2023/24 tax year is £20,000. You can split this across multiple types of ISAs (e.g., cash ISAs, stocks & shares ISAs, and Innovative Finance ISAs), but only up to £4,000 can go into your Lifetime ISA.

3. Benefits of a Lifetime ISA

A Lifetime ISA offers a range of benefits that make it an attractive option for saving towards long-term goals like buying a first home or planning for retirement. Below are the key advantages of using a Lifetime ISA:

Government bonus: - One of the main advantages of a Lifetime ISA is the 25% government bonus on your contributions. For every £4,000 you save each year, the government will add £1,000, meaning you could receive up to £1,000 annually, significantly boosting your savings.
Tax-free growth: - Any interest, income, or capital gains generated within your Lifetime ISA are completely tax-free, allowing your savings or investments to grow more efficiently compared to taxable accounts.
First-time home purchase: - You can use your Lifetime ISA to buy your first home worth up to £450,000, provided the account has been open for at least 12 months. This makes it a valuable tool for first-time buyers, as the government bonus can be used toward your deposit.
Retirement savings: - If you're not buying a first home, the funds in your Lifetime ISA can be used for retirement. From age 60, you can withdraw the money, including the government bonus, tax-free. This can complement your pension savings.
Flexible savings options: - Whether you prefer the low-risk approach of a cash LISA or the potentially higher returns of a stocks & shares LISA, a Lifetime ISA offers flexibility depending on your financial goals and risk tolerance.

LISA bonus calculator:

This calculator will work out the bonus you will receive when you contribute to a LISA. This doesn't take into account any growth over time, which you can explore using our LISA benefit calculator.

Tax year contribution:

Government bonus:

4. Drawbacks of LISAs

While Lifetime ISAs (LISAs) offer valuable benefits like the 25% government bonus, they do come with some restrictions and potential disadvantages. Here are the key drawbacks to consider:

Withdrawal penalty: - Withdrawing funds before age 60 for anything other than a first-time home purchase incurs a 25% penalty. This not only forfeits the government bonus but also means you may lose some of your original savings.
Lower contribution limit: - You can only contribute up to £4,000 per year into a LISA. While this is beneficial for many, it's significantly lower than the £60,000 annual limit available for pensions, limiting how much you can save tax-efficiently.
No employer contributions: - Unlike workplace pensions, LISAs do not benefit from employer contributions, which can greatly boost your retirement savings.
Impact on first-time home buyers: - While LISAs are designed to help first-time buyers, the maximum property value you can purchase with LISA funds is capped at £450,000. In certain regions with higher property prices, this may limit your options.

5. LISA eligibility

To open and contribute to a Lifetime ISA, you must meet certain eligibility criteria. On top of eligibility, there are suitability requirements to consider. To help with this, we have built a LISA eligibility calculator.

Age: - You must be between 18 and 39 years old to open a Lifetime ISA. Once opened, you can continue contributing until you turn 50.
UK Resident: - You must be a resident of the UK to open and contribute to a LISA. British Crown servants (e.g., diplomats or armed forces) working overseas, and their spouses or civil partners, are also eligible.

6. Using a LISA to purchase a property

A key benefit of the Lifetime ISA (LISA) is its ability to help first-time buyers save for a deposit on their first home. Below are the essential details for using your LISA to purchase property:

First-time buyer requirement: - You must be a first-time buyer, meaning you have never owned a property in the UK or anywhere in the world.
Property value: - The property you wish to buy must have a purchase price of £450,000 or less, whether you are buying on your own or with someone else.
LISA account duration: - Your Lifetime ISA must have been open for at least 12 months before you can use the funds toward buying a home.
Using your LISA for the deposit: - The funds from your Lifetime ISA will be paid directly to your conveyancer or solicitor, who will then use it as part of the deposit in the mortgage process.
Mortgage requirement: - You must be purchasing your home with a standard mortgage. You cannot use LISA funds if you are getting a private mortgage from family members or other connected persons.

Restrictions on private mortgages:

You cannot use your Lifetime ISA if the mortgage is arranged privately through a relative (such as a parent, grandparent, or sibling), your spouse or civil partner, or a relative of your spouse or civil partner. The funds must be used with a traditional mortgage provided by a recognized lender.

Buying with someone else:

If you're buying with someone else, and they also have a Lifetime ISA, both of you can use your LISA funds and receive the government bonus, provided:

You are both first-time buyers.
You both meet the conditions for using a LISA.

7. Using a LISA for retirement

A Lifetime ISA (LISA) can also be used as a tool for retirement savings. If you don't use your LISA to buy a home, you can access the funds from age 60 for retirement. Although a LISA is not a replacement for a pension, it can be a useful supplement.

Retirement age: - You can withdraw your Lifetime ISA funds from the age of 60, at which point the funds (including the government bonus) can be accessed tax-free.
Tax-free withdrawals: - Any withdrawals made after you turn 60 are completely tax-free, making it a useful way to boost your retirement savings alongside your pension.
Flexibility in early access: - You can access your LISA funds before age 60 for reasons other than buying a home, but a 25% penalty applies. This means you lose some of your contributions and the government bonus. By comparison, pensions generally cannot be accessed until age 55 (57 from 2028), and early access often requires special circumstances, such as ill health, and can incur heavy tax penalties.

8. LISA or pension?

When it comes to saving for retirement, both Lifetime ISAs (LISAs) and pensions offer valuable benefits. However, they have key differences in terms of contribution limits, tax advantages, access to funds, and employer contributions. Understanding how they work individually and together can help you make an informed decision about which is best suited for your retirement goals.

Contribution limits:

LISA - You can contribute up to £4,000 per year, and the government adds a 25% bonus (up to £1,000 annually).
Pension - Annual pension contributions are generally capped at £60,000 (the Annual Allowance for most people), or 100% of your earnings, whichever is lower. This allows for much larger contributions compared to a LISA.

Tax benefits:

LISA - The government bonus of 25% is added to your contributions, and any growth is tax-free. However, contributions are made from after-tax income.
Pension - Pension contributions receive tax relief at your marginal tax rate. This means basic-rate taxpayers receive 20% tax relief, higher-rate taxpayers get 40%, and additional-rate taxpayers get 45%. Pensions offer better tax relief, especially for higher earners.

Age to access funds:

LISA - Funds can be accessed tax-free from age 60. You can access them earlier for a first-time home purchase, but any other withdrawals before 60 incur a 25% penalty.
Pension - Pension funds can generally be accessed from age 55 (rising to 57 in 2028), with 25% of the total fund being tax-free. The remainder is subject to income tax at your usual rate.

Flexibility of withdrawals:

LISA - After age 60, you can withdraw the full amount (including the government bonus) tax-free. Before age 60, withdrawals for reasons other than a first-time home purchase incur a 25% penalty.
Pension - Pensions offer flexibility through options such as taking tax-free lump sums, buying an annuity, or using drawdown schemes. However, withdrawing more than 25% will be taxed as income.

Employer contributions:

LISA - LISAs do not receive employer contributions.
Pension - If you are employed, your employer will usually contribute to your pension scheme, making it a highly attractive option for boosting your retirement savings.

Best for:

LISA - Ideal for first-time home buyers and as a supplementary retirement savings tool, particularly for those who have already maximized their pension contributions or are self-employed without employer contributions.
Pension - Best for those seeking larger tax advantages, especially higher earners and those with access to employer contributions. Pensions also allow for more significant contributions over time.

Which to choose?

You don't have to choose between a LISA and a pension—they can work together. For example, you might use a LISA for the 25% government bonus and tax-free withdrawals at age 60 while also contributing to a pension for its larger tax relief and employer contributions.

9. How to choose between a stocks & shares and cash LISA

Choosing between a stocks & shares Lifetime ISA (LISA) and a cash LISA depends on your financial goals, risk tolerance, and time horizon. Both options allow you to save for a first home or retirement with the added government bonus, but they differ in how your money grows and the risks involved.

Cash LISA: - A cash LISA is a low-risk option that earns interest on your savings. It is suitable for individuals who prefer security and guaranteed returns without the risk of losing money. The interest is tax-free, and your funds are protected by the Financial Services Compensation Scheme (FSCS) up to £85,000.
Stocks & shares LISA: - A stocks & shares LISA allows you to invest your contributions in the stock market. It has the potential for higher returns than a cash LISA, but it also comes with higher risk. The value of your investments can fluctuate, and you could lose money if the market performs poorly. However, over the long term, it offers the opportunity for greater growth, particularly if you're saving for retirement.

Factors to consider when choosing:

Your risk tolerance: - If you prefer guaranteed returns with no risk to your capital, a cash LISA may be the best option. If you're comfortable with market fluctuations and are focused on long-term growth, a stocks & shares LISA could provide higher returns.
Time horizon: - A stocks & shares LISA is generally more suited for those with a longer time frame (e.g., 5 years or more), as this allows your investments to recover from any short-term market volatility. A cash LISA is ideal if you plan to buy a home in the next few years or want to avoid market risk as you approach retirement.
Interest rates v market growth: - Cash LISAs offer interest rates that are typically lower than the potential returns of the assets that can be held in a stocks & shares LISA. In a low-interest-rate environment, the returns from a cash LISA may not keep pace with inflation, while a stocks & shares LISA provides the potential for inflation-beating returns over time.
Access to your funds: - Both types of LISAs allow penalty-free access if used for a first-time home purchase (subjet to conditions) or after age 60 for retirement. However, early withdrawals for other purposes incur a 25% penalty, which applies to both the government bonus and part of your original savings.

Which should you choose?

If you're risk-averse and focused on saving for a home in the near future, a cash LISA may be the right choice. For those with a longer time frame and a higher tolerance for risk, a stocks & shares LISA could offer better growth potential, especially when saving for retirement. In some cases, a mix of both might suit your financial goals.

10. How much could my LISA be worth in the future?

Make the most of your ISAs by contributing early in the tax year, diversifying your accounts, and considering long-term investments with your stocks & shares ISA.

LISA growth calculator:

This calculator will work out the growth of your LISA based on the inputs. For more options, use our LISA benefit advanced calculator.

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Initial amount:

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Monthly contribution:

Interest rate, AER:

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