Lifetime ISAs allow you to collect free money from the government to spend either on buying your first home or funding your retirement. But they're only available for these specific purposes and there are certain age stipulations.
Compare lifetime ISAs
What are Lifetime ISAs?
ISAs (individual savings accounts) are savings accounts that allow you to avoid paying taxes on the interest you earn, you’re able to save up to £20,0000 in each tax year without paying any tax on your profits (correct for the 2023/2024 tax year). Lifetime ISAs are a type of ISA that’s specifically designed to save for your first home or retirement.
If you decide to put money in a LISA, you earn from your savings in two ways:
- A 25% free bonus from the government. You can put up to £4,000 a year into your account, and you’ll be able to get up to £1,000 a year for free.
- The interest rate offered by the bank. You won’t have to pay any tax on this interest. You can also invest in a lifetime ISA, so your interest rate wouldn’t be fixed.
A LISA gives you good value for your money – but only if you’re prepared to use your saved money for your retirement or your first house. There are some added caveats mentioned below.
ISAs vs regular savings accounts
- With ISAs, you earn tax-free interest on your savings account.
- Since April 2016, the “personal savings allowance” allows you to avoid paying any tax on up to £1,000 (£500 for higher rate taxpayers) of interest you earn from any banking product (not just ISAs).
- ISAs have since become less popular because the added value they bring in comparison to savings accounts has diminished.
How do lifetime ISAs work?
A lifetime ISA follows all the rules of traditional ISAs, meaning you’ll pay no tax on interest earned, and the amount you can deposit per tax year is capped. You can deposit a maximum of £4,000 per year in a lifetime ISA.
However, on top of the interest paid, you’ll also earn a 25% bonus from the government on the amount the amount you deposit each tax year. This bonus is available every year until you turn 50.
But there’s a catch: The money can only be withdrawn after 12 months of opening the account to help pay for your first property (worth up to ) or after you turn 60 years old if you intend to use it for your retirement. If you decide to withdraw it in any other circumstances, you’ll face a 25% penalty. (This penalty was reduced temporarily to 20% between 5 March 2020 and 5 April 2021, in response to the COVID-19 pandemic).
The 25% withdrawal penalty means that, if you wanted to withdraw all the money saved in a lifetime ISA, you would end up with less money than you deposited. For example, if you deposited £800 in a tax year (and received the £200 government bonus) you would only receive back £750 after the government takes 25% of the £1,000 total.
Lifetime ISAs are available as cash ISAs or stocks and shares ISAs. You must be aged between 18 and 39 to open one.
How to find the best lifetime ISA?
The most important factor to consider when searching for a lifetime ISA is the interest rate paid. You can find the best interest rates by searching for lifetime ISAs on any price comparison website.
Customer service ratings might be of interest to you, but for most savers, this pales in comparison compared to the interest rates on offer.
Which are the best lifetime ISAs at the moment?
Our best lifetime ISAs are the highest interest rates available. To get the latest rates, we use Moneyfacts data, which covers nearly the full market of savings products and is checked and updated daily. We don’t include accounts from private banks.
All the lifetime ISAs in our list have savings protection – for most, this is the Financial Services Compensation Scheme (FSCS). Other schemes include that of NS&I, which is 100% backed by HM Treasury, and the Gibraltar Deposit Guarantee Scheme.
- Moneybox – Moneybox Cash Lifetime ISA - 4.25%
- Bath BS – Lifetime ISA - 3.79%
- Paragon Bank – Cash Lifetime ISA (Issue 3) - 3.51%
- Beehive Money – Online Lifetime ISA - 3.5%
- Skipton BS – Online Cash Lifetime ISA Issue 4 - 3.25%
How many LISAs can I have?
You’re not forbidden from having more than one single Lifetime ISAs, but you cannot pay money into more than one of them in a single tax year.
If you’d rather have one Lifetime ISA for retirement and another one to buy your first house, you can do that, but you’ll have to pay into them in alternate years. Also, the £4,000 yearly limit is a strict one you won’t be able to bypass.
Are LISAs worth it?
As with most financial products, it really depends. A free 25% boost to your savings is not to be brushed off, but equally, don’t let the mirage of easy cash blind you.
LISAs are viable options both for buying a house and for saving for retirement, but in some cases, they aren’t the best option for either.
For example, have you considered increasing your pension contributions? When you put money into your pension, you get tax relief on it – it’ll be worth at least 20% and even more if you’re a high-rate taxpayer. Since the money you put in your LISA has been taxed at the source (when your salary was paid to you), and you cannot get more than the 25% back, pensions can ultimately turn out more rewarding.
Moreover, if you need to claim government benefits, for example because you find yourself unemployed, you may need to withdraw your LISA before becoming eligible to do so, but pensions don’t count – and the same is usually true for bankruptcy cases.
LISAs are a smart choice, but you must really be confident that you won’t need the money you put aside any time soon. If you withdraw it in advance, the bill will be depressingly expensive.
An overview of our lifetime ISA comparison
|Rates up to||4.25% AER|
|Number of accounts||6|
|Opening options||Branch, website, mobile app|
Pros and cons of a lifetime ISA
- Earn tax-free interest on your savings
- A huge government bonus available every year until you turn 50
- Available as a cash ISA or a stocks and shares ISA
- You can only withdraw your funds in very specific circumstances or you’ll face a 25% penalty
- Only available to those aged between 18 and 39
The government bonus on offer with lifetime ISAs is very generous, but you should be extremely sure you want to open one before you do. Withdrawals can only be made to buy your first home or fund your retirement, unless you’re willing to face a 25% fine.
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