Our guide to Lifetime ISAs

Wondering how Lifetime ISAs work? We explain more and answer your Lifetime ISA questions in this guide.

WRITTEN BY

Amanda Aumonier

Mortgage Expert

18th July 2023

In this guide:

What is a Lifetime ISA?
Am I eligible for a Lifetime ISA?
How can I open a Lifetime ISA?
How much can I pay into a Lifetime ISA?
Is a Lifetime ISA worth it?
Lifetime ISA providers to consider
Lifetime ISAs vs Help to Buy
What if my Lifetime ISA performs badly?

Better.co.uk does not currently advise on Lifetime ISAs, but you can learn more about them in this guide.

What is a Lifetime ISA?

A Lifetime ISA is a tax-free savings account. It can help first-time buyers buy their own home, or help save for retirement.

If you invest a maximum of £4,000 a year into a Lifetime ISA, the government will then boost that by 25%. This means for every £4 you save, you’ll get a £1 bonus added to your ISA. You'll get this bonus each month.

You can have other ISAs alongside your Lifetime ISA. But only up to the UK ISA limit which is currently £20,000 per tax year. (1)

If you put the yearly maximum of £4,000 into your Lifetime ISA, you can also pay up to £16,000 into one of the other ISA products.

You can choose if you want to invest in a cash Lifetime ISA or a stocks and shares Lifetime ISA. Both will get bonus payments.

Am I eligible for a Lifetime ISA?

If you’re aged between 18 and 40 you can open a Lifetime ISA and start saving for your first home or retirement.

Like any ISA, it’s tax-free.

You can only cash it in to buy a first property. This restriction applies until you’re 60 years old.

If you do not use your Lifetime ISA to buy a first property, you can take the money out once you turn 60. You can then use it for your retirement, or spend it on what you want.

If you need to withdraw the money before you’re 60, for anything other than a buying a home, you’ll have to pay a 25% penalty fee. (2)

How can I open a Lifetime ISA?

If you're eligible, you can pick a provider that offers the type of Lifetime ISA you want. Either cash or stocks and shares.

It's easy to open a Lifetime ISA and your provider will often walk you through it.

You can set up regular payments into your Lifetime ISA. You can also transfer money from existing ISAs if that suits you.

How much can I pay into a Lifetime ISA?

You can pay as much as £4,000 a year into your Lifetime ISA, between the ages of 18 to 50. This is as long as your payments into this and other ISAs is not aove the yearly limit of £20,000.

You’ll only get the government bonus on the first £4,000 each year. You may want to consider other ISAs if you have money to spare, with fewer restrictions on taking the money out.

Is a Lifetime ISA worth it?

Whether a Lifetime Isa is worth it depends on your situation.

There is the potential for plenty of ‘free money’ here. If you save £4,000 a year, from 18 to 40, the total value of government contributions would be £22,000. That’s a lot that you can put towards your house deposit.

You can pay into it until you're 50. If you pay the £4,000 a year into your Lifetime ISA and cash out at 60, you could have £32,000 of government bonuses. This could help fund your retirement.

Lifetime ISA providers to consider

Different providers offer different products and different terms and conditions. Some offer a good deal on both cash Lifetime ISAs and stocks and shares Lifetime ISAs. Others specialise in one or the other.

You can compare Lifetime ISAs using a comparison site.

Some Lifetime ISA providers include:

AJ Bell
Hargreaves Lansdown
Nutmeg
Forester
Moneybox
OneFamily

To find the best Lifetime ISA for you means looking at what’s on offer, and which is best suited to your needs.

Think about things like how much you’ll save each month, annual fees, and interest rates offered. (3)

Check that any ISA you invest in offers protection for your money. They usually do this through the Financial Services Compensation Scheme (FSCS).

Lifetime ISAs vs Help to Buy

Many potential homeowners consider a Help to Buy ISA.

Like the Lifetime ISA, the government will pay in bonuses depending on how much you save.

Differences

With a Lifetime ISA you:

could save more money and earn bigger bonuses
are not limited by a monthly deposit cap like you are with the Help to Buy ISA
can pay in a lump sum if you get one. As long as it does not put your total Lifetime ISA contribution over the £4,000 yearly limit
have fewer restrictions on the property you can buy

With a Help to Buy ISA, you can only buy a property worth up to £250,000 (or £450,000 in London).

With a Lifetime ISA, you’ll be able to buy a home worth up to £450,000 anywhere in the UK.

You can transfer a Help to Buy ISA to a Lifetime ISA.

This is simple to do with providers who offer both. You'll need to understand how this will change the conditions. You should also check that there’s nothing that will trip you up in the future. (4)

What if my Lifetime ISA performs badly?

It does not matter if a stocks and shares Lifetime ISA performs badly.

The bonuses are based on what you pay in, not the total amount in the ISA. You’ll still get your bonuses on every sum you pay in, up to £4,000 each year.

Your interest rate on a cash Lifetime ISA will not affect your bonuses either. As long as you’re paying in, you’ll still get your bonuses.