Stressed out about how you'll ever be able to afford a home? A lifetime ISA can give you £1,000 of free cash towards your first home.
Our recent Student Banking Survey found that a third of students didn't know what a LISA was and only 18% had one. With up to £1,000 a year in freebies, we feel it's our duty to shout about it.
The main appeal of a Lifetime ISA (essentially an enhanced tax-free savings account) is that for many young people it may be the only hope of saving enough money to get on the property ladder.
LISAs are also a great way to get into the habit of saving money every month, and there's no minimum monthly savings amount, meaning you can save as much as you want. So how do they work?
What's in this guide?
ISA for life. in one word
What is a Lifetime ISA?
How can you spend your LISA?
How much can you save over a lifetime with an ISA?
The risks of having a LISA
How do you open a lifetime ISA?
The best ISAs for life
Help buy ISA vs Lifetime ISA
Lifetime ISA summary
If you don't have time to read about LISA in detail, here's a quick summary of all the key details:
- You can pay a maximum of £4,000 into your Lifetime ISA each year
- The government will then give you a bonus of 25% of what you save (ie a maximum of £1,000 each year).
- The earliest you can use your LISA fund is one year after you make your first deposit
- You must be aged between 18 and 39 to open a Lifetime ISA
- You can make deposits and get a 25% savings bonus every year until you turn 50
- You can't use your LISA money unless it's to buy your first home, you're aged 60 or over or (unfortunately)
- you're terminally ill and have less than 12 months to live.
- The maximum home value you can place a LISA on is £450,000 (on a property anywhere in the UK)
- You can combine your LISA with a partner to buy a house (who can also use their own LISA)
- You cannot use LISA to buy a rental property. must intend to live there
- You can open a Help to Buy ISA at the same time as a LISA, but you can't use both to buy property (note: you can no longer open Help to Buy ISA accounts)
- You can transfer any Help to Buy money to your LISA
- WARNING: If you withdraw early (ie before age 60 without putting down your first home), you'll be charged a 25% fee (equivalent to losing your 25% bonus and a 6.25% penalty on the remainder).
What is a Lifetime ISA?
Let's start with the basics. An ISA (Individual Savings Account) is a bank account that allows you to save cash each year tax-free.
In the past, the appeal of an ISA was that you would be required to pay tax on the interest earned on a regular savings account, whereas ISAs were tax-free (as long as you followed the rules, more on that later).
However, now basic rate taxpayers (anyone earning less than £50,270 a year) can earn up to £1,000 a year in interest on all their accounts without paying any tax.
This led many to believe that the ISA no longer existed. Whether or not this is true for standard ISAs is a matter of debate, but one thing is certain. The Lifetime ISA (LISA) is a different kind of kettle, and we like it a lot.
The LISA is, in part, the Government's way of helping young people move up the ladder by contributing an extra 25% to the money they save to pay a deposit for a first home.
We'll go into more detail later, but you can earn up to an extra £1,000 a year from the government for free.
And, if you're not interested in using the LISA to buy property, it can also be used as a retirement fund (more on that below).
Should students get a Lifetime ISA?
Clearly, lifetime ISAs are a great savings option for anyone looking to secure their future, and that includes students and graduates.
Getting ready to buy your first home or thinking about retirement may seem a little crazy right now, but remember that saving takes time. As such, it's good to start thinking about these things as early as possible.
It's also worth noting that having a LISA will not affect the size of your eligible maintenance loan and will have no effect on your Student Loan repayments.
Reasons to open a LISA
Here are some good reasons to open a Lifetime ISA:
- After the death of a family member, you received some money from an inheritance and you are not sure how to invest it.
- You'll find that you usually have a little left over after the service loan payments are made, but you usually put it into a savings account or enjoy something nice.
- Are you thinking about buying your first home within the next 10 years?
- You'll want to be self-employed after college, so you may not have a retirement plan.
Do you want an ISA that gives you access to money when you need it? We've researched the best ISAs available for students.
What is a Lifetime ISA for?
You can only withdraw money from your Lifetime ISA (without charge) in three circumstances.
Apart from being terminally ill and having less than 12 months to live (sorry, sad, but we had to mention it), the other two circumstances where you can withdraw from your LISA are:
Buying your first house
If you are thinking of getting on the property ladder as soon as possible, LISA is a great option as long as:
- Looking to buy property in the UK
- You do not yet own or part of a property (anywhere in the world)
- You plan to buy real estate instead of renting it to others
- You will be looking to buy a home that costs less than £450,000.
You and a partner can combine your LISAs to buy a new property together.
And more importantly, your LISA will not automatically close after you buy a property. You can choose to close it or continue to use it to save for a retirement fund.
Saving for retirement
If you start saving for a property but then, for whatever reason, decide you don't want to use a LISA to buy your first home, you can avoid losing your bonus money (and being fined) by continuing to use your LISA. n as savings for retirement.
In this situation, you don't need to do anything, but it means you won't have access to the money until you turn 60 (although the bonds will stop paying after age 50).
If you decide to use your LISA for retirement, it shouldn't be used as a substitute for a pension plan, which will give you a much better deal in the long run. Instead, it's a nice added bonus.
As with any loan or savings account, the terms of a LISA can change before you turn 60.
How much can you save with a Lifetime ISA?
The amount you save with a LISA depends on the amount you put into the account each year. There is no minimum amount you must pay monthly or annually, so you can pay in installments if and when you can afford it.
However, there is a maximum amount. you can only contribute up to £4,000 a year to your LISA. With the government's 25% annual bonus, you can earn up to £1,000 in extra cash, bringing your annual savings to £5,000.
Don't forget that ISAs work by financial year (April 6-April 5), regardless of when you open your account. If you open it in January, you have until April 5 of that year to deposit (up to £4,000) and secure that year's bonus.
The best scenario. If you opened your LISA on your 18th birthday and saved the maximum amount of £4,000 each year, by the time you retire you would have saved £132,000 and received an extra £33,000 from the Government. That's a lot of free money and a total jackpot of £165,000 in today's money (not counting the extra interest over time).
And, just remember that the bonus you get is based only on your investment. No matter what the interest rate is on your Cash LISA, or how much you earn with a stocks and shares LISA, the Government bonus will always be the same.
How do you get your Lifetime ISA bonus?
Your Lifetime ISA's 25% bonus can be paid monthly or annually and can earn interest on your entire account balance. However, the interest earned doesn't count towards your £4,000 so you can't use it to earn more than one bonus.
And even if the 25% bonus is paid monthly, that doesn't mean you have to make monthly deposits to get it. If you prefer to make a lump sum deposit once a year, you will still earn 25% of what you paid.
It's also worth noting that if you use a LISA to buy property, the funds will go directly from the bank to the solicitor responsible for the property purchase.
This means that while you will be able to see the bonds come in and see your money grow, you won't be able to get hold of the cash as it will be transferred between banks and lawyers.
The only exception to this is if you decide to withdraw it early (with a penalty) or after your 60th birthday, in which case the money goes to you straight away.
Early withdrawals and other Lifetime ISA risks
ISA accounts are a great way to protect your money, especially from yourself. There will always be some risks, and while they shouldn't be too much of a concern, they should still be considered.
If you change your mind about the bank or mortgage company that holds your LISA, don't panic; you can easily transfer from one provider to another without losing any of your interest or bonuses (although some providers may charge a one-time administration fee. ). for this).
However, if you decide you want your cash before you turn 60 and don't want to buy your first property with it, there's usually a 25% charge on the amount you withdraw.
This is equal to the full 25% bonus you received from the government plus an additional 6.25%. This is because the 25% fee will be applied to the amount you save after adding the government bond.
For example, imagine you have £1,000 in your LISA and you get a 25% bonus on £250. If you decide to withdraw early, you will have to pay a 25% fee on a total of £1,250, which is equivalent to £312.50. As a result, you will only take home £937.50 instead of the original £1,000.
There are also additional risks associated with both types of lifetime ISAs:
Cash LISA risks
This is more like a regular savings account, where you choose how much you deposit and earn tax-free interest at a pre-set rate.
The only risk with this option would be if the bank you have your LISA with goes bankrupt, in which case you'll be protected for up to £85,000. Although this sounds like a lot (and, to be fair, it is), if your LISA balance is above this amount, you could lose anything over £85,000 if the bank crashes.
Stocks and shares LISA risks
This option involves investing your LISA money directly in stocks and shares.
As is always the case with anything based on the stock market, this option involves higher risks, but can provide higher returns if your stocks perform well. Of course, if your investments do poorly, you can lose money.
There are also fees associated with shares and LISA shares, and these will eat away at your savings (maybe not much, but it's still your money).
Due to the uncertainty and risks involved, we always recommend that you do your due diligence and seek professional advice before investing in this way.
How do you open a Lifetime ISA?
Opening an ISA is a fairly simple process and really shouldn't take you long. That said, you may need some paperwork, and you'll definitely need your National Insurance number.
Can your parents open a LISA on your behalf?
Your parents can of course guide you as much as you need, but as ISAs are personal banking products, you'll need to open the account yourself (using the details above to get you started).
However, your parents can ‘gift' you a tax-free amount each year to pay towards your ISA for life, so remember to be nice.
Can you have more than one Lifetime ISA?
You can have more than one ISA at the same time where you make payments each month and earn interest.
You can also have more than one lifetime ISA, but you can only pay into one each tax year .
The maximum amount you can save across all your ISA accounts combined is £20,000 a year.
Best lifetime ISA providers
Since LISA's launch in April 2017, banks haven't taken the opportunity to offer them to the public, but here they are.
Remember to think carefully about whether you want LISA cash or stocks and shares and know what the differences are.
Best cash Lifetime ISAs
These are the Lifetime Cash ISAs that offer the best interest rates;
1.Moneybox Lifetime ISA (0.85% incl. 12 month 0.6% bonus)
- Minimum deposit – £1
- Interest Paid – Monthly
- How to Open/Log in – App.
This app-only Moneybox LISA offers one of the highest interest rates on the market (although the base rate of 0.25% is variable, so the total rate can go up or down). And, as if that wasn't enough, it's super easy to use.
The Moneybox app is very easy to use and opening a LISA only takes a few minutes, making it ideal for someone who is just getting to grips with their finances.
Beehive Money Lifetime ISA (0.9%)
- Minimum deposit – £10
- Interest Paid – Annually
- How to Open/Log in – App.
The Beehive Money Lifetime ISA is one of the more recent additions to the market. But accepting all former Nottingham Building Society LISA customers in 2021, it is also one of the most popular options.
Beehive's LISA can only be accessed and managed through an app, and thankfully it's very simple and easy to use.
Paragon Lifetime ISA (0.7%)
- Minimum investment – £1
- Interest paid – Annually
- How to open/access – Open online, manage online, by phone or post.
Although its interest rate is lower than that offered by Moneybox or Beehive Money, Paragon's Lifetime ISA is still well ahead of most cash LISAs on the market (many of which offer significantly lower interest rates). 0.4%).
Plus, if you prefer not to access your LISA online, Paragon is the only provider in the top three that also allows you to manage your funds by phone or post (although the account can only be opened online).
Best stocks and shares Lifetime ISAs
WARNING: As with all investments, your capital is at risk. The value of your portfolio may go down as well as up, and you may get back less than you invested. Lifetime ISA rules apply.
LISA's stocks and shares market is slightly larger than the cash equivalent, although that's still a relatively small gain.
The amount you can end up earning with these LISAs depends on where you choose to invest your cash.
We're not here to tell you where and how much to invest, but what we can do is describe which LISAs offer you the greatest variety of investments and which will manage your investments completely for you for:
With that in mind, here are the top LISA stocks and shares:
1.AJ Bell Youinvest stocks and shares Lifetime ISA
- Minimum investment: £500 lump sum or £25/mont.
- Annual Fees: 0.25% base fee plus additional transaction fees.
AJ Bell's Lifetime ISA offers a wide range of investment options including shares, funds and exchange-traded funds.
Of course, all of this requires knowledge (and preferably experience) of what you're investing in. If you are more of a beginner, AJ Bell also offers you complete portfolios to invest in with different levels of risk.
Claim this LISA »
2.Hargreaves Lansdown stocks and shares Lifetime ISA
- Minimum investment: £100 lump sum or £25/month
- Annual Fees: 0.45% base fee plus additional transaction fees.
Hargreaves Lansdown has thousands of investment options to choose from (over 2,500).
While this sounds great, it also means it's best for investment-savvy people who want to be more involved in investing.
But this does not mean that you will remain in the dark. your financial advisors can help if you are unsure about something.
3.Nutmeg stocks and shares Lifetime ISA
- Minimum investment: £100 lump sum
- Annual fees. varies by portfolio.
Nutmeg is an app/robo-advisor that takes the hassle out of deciding where to invest and makes your investments for you based on the risk you're willing to take.
They'll ask you a few questions that will determine whether you want to play it safe or take riskier options, and then one of your investment professionals will take over.
They offer four main LISA options: With a fully managed portfolio, the team will regularly monitor your investments and make strategic decisions to protect against losses. They now also offer socially responsible portfolios, which are essentially the same but focus on investing in companies with “high environmental, social and governance standards.”
While the Smart Alpha version is powered by J.P. Morgan Asset Management and aims to adapt its portfolio to changing market conditions.
Finally, there is the Fixed Allocation portfolio, a cheaper option (0.45% commission instead of 0.75%) that is designed to operate without intervention.
Moneybox stocks and shares Lifetime ISA
- Minimum deposit – £1
- Annual fees: £1 per month (free for the first three months), plus a monthly platform fee of 0.45%, plus an
additional 0.12% – 0.3% fund manager fees.
As we explained earlier, the Moneybox app is really easy to use, which makes it a great shout for those who are new to the investment scene.
They simply have three investment options (cautious, balanced or adventurous) and you choose one based on the risk you are willing to take.
But our favorite feature of Moneybox is the ability to automatically deposit your ‘spare change'. Simply connect your debit/credit card to the app and for every purchase you make, they'll round it up to the nearest pound and deposit the difference.
So, for example, if you spend £2.20 on a sandwich, they'll round it up to £3 and automatically spend 80p on you.
Help to Buy ISA vs Lifetime ISA
The Help to Buy (HTB) ISA is very similar to the LISA, so much so that there has been speculation that the HTB could have been launched as a springboard that the government used to test the waters before announcing the Lifetime ISA.
In fact, since the launch of the Lifetime ISA, the Help to Buy ISA has been closed to new customers.
However, if you have HTB and are thinking about switching to LISA, it's worth learning about the similarities and differences between the two.
Help to Buy and Lifetime ISA differences
These are the key differences between a Help to Buy and a Lifetime ISA;
- A Help to Buy ISA can only be used to buy your first property, while a LISA can be for first-time buyers or pension funds.
- You can save more with a LISA (£4,000 a year from £2,400 a year for an HTB).
- Help to Buy means you'll save more in the short term and therefore have a maximum bonus of £3,000, while a LISA can also be used for retirement, so you can save up to £33,000.
- The bonus doesn't apply until you buy a home with HTB, so you never earn interest on the bonus (unlike a LISA).
- As the bonus doesn't apply until the sale takes place, the HTB also can't be used for a deposit on a property, whereas a LISA can.
- You can buy a house with the money you've saved in the HTB ISA once you've saved £1,600 (possible in three months), while you have to wait a year before you can spend the LISA savings.
- If you want to buy in London, both the HTB and LISA can be used on properties up to a maximum value of £450,000. In fact, a LISA can be used to buy a property of that value anywhere in the UK, but with HTB the limit is reduced to £250,000 outside of London.
- HTB ISAs were available to any first-time buyer over 16, while LISAs were for over 18s.
- HTB ISAs are cash only, while LISAs offer both cash and stocks and shares ISAs.
Wondering how you can top up your Lifetime ISA with cash? Check out our list of cost-effective habits that could save you £100 (if not more!) every year.