The launch of the LISA (Lifetime ISA) in April 2017 was a damp squib – with few providers offering them. There are only a few more now, but even with limited choice, don't ignore it, as £1,000 of annual free cash is nowt to be sneezed at, and for first-time buyers delay could cost. It's similar for retirement savings – but whether it beats a pension is a much trickier conversation.
This guide by MoneySavingExpert.com founder Martin Lewis and MSE's chief analyst Helen Saxon takes you through everything you need to know about the LISA, and – crucially – all the latest best buys. If there's anything you think we've missed please let us know.
Lifetime ISA need-to-knows & best buys...
- What is a Lifetime ISA?
- First-time buyer LISA need-to-knows, incl
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Lifetime ISA need-to-knows
What is a Lifetime ISA?
The Lifetime ISA (LISA) is a tax-free wrapper that lets you put up to £4,000 in it every year. It can be as cash savings – so you get interest – or stocks and shares investing – so you get share growth (or loss). It's designed for two specific purposes. The first is for first-time buyers to use towards a deposit for a residential property (see the LISA for first-time buyers). The second is for later life (OK, let's call it retirement) savings once you hit age 60 (see the LISA for retirement).
And if you decide to use the LISA to buy your first home, you can keep it open and save for retirement. The idea behind mixing the two is a bit of behavioural economics. Many under-40s are turned on by saving for their first home in a way they aren't for saving for retirement, so the idea of bringing them together is that hopefully people will build up a savings habit for their first home, then, with a zest for saving, carry on afterwards.
However, the strategy for saving for a home in the short term and retirement in the long term are very different.
Can the LISA rules change?
Yes they can. Parliament has the power to change anything. However, it's unlikely that if you've saved in it and had the bonus (which is first paid in May 2018 and then monthly after) that it will be taken off you. What is more plausible is that a future government decides it will stop paying future bonuses, or will change the withdrawal penalties or amounts that you can pay in, or it could add extra things you can get a bonus for.
So you should be pretty confident that, if you're putting money in to get the bonus for use on a home or retirement, you'll actually get it. And if the bonus is stopped, just stop putting money in.
How does the LISA's tax-free status work?
The Lifetime ISA is, well, an ISA – an individual savings account – which is a place to save where the taxman can't get his hands on the interest you make.
You can put up to £20,000 in ISAs in this tax year – and the money you put in your LISA will count towards that. So if you put £4,000 in the LISA this tax year – on top of which you'll get a 25% state bonus – you'll only be able to put £16,000 in other ISAs. The bonus you get doesn't count towards the year's ISA allowance.
How the tax works depends on whether you're saving or investing...
Cash LISA savings
Interest is paid tax-free on the amount you contribute and any state bonus that's already in the account when the interest's paid. You get to keep all of this interest, and the next year you'll earn interest on it too – this is known as compound interest.
Also, the interest earned doesn't count towards your personal savings allowance, so there's no impact on your ability to earn £1,000 a year of interest tax-free as a basic-rate taxpayer from other savings (£500 higher rate).
This is more complex as investment gains come in three main types: dividends, capital gains and bond interest. You might pay tax on these outside a LISA; if you have them held within a stocks & shares LISA, however, you don't pay tax on any of them.
You get a 25% bonus each tax year on everything you put in
You can save up to £4,000 a year in a LISA as a lump sum or by putting in cash when you can. The state will then add a 25% bonus on top. So if you save £1,000, you'll have £1,250 and if you save the full £4,000, you'll have £5,000. And that's before interest or growth.
- The bonus is paid every year until you hit age 50.
- The first year's bonus will be added to your account in May 2018. From the 2018/19 tax year onwards, the bonus is paid monthly (assuming you've contributed that month).
- Once in your account it counts as money, so you'll get interest on it too (or investment growth/loss).
- You only get the bonus on contributions, not interest or stocks and shares growth/loss.
- The max bonus is £33,000 if you open it at 18, and max it out until you hit 50 (unless you're born on 6 April, when the max is £32,000).
Can I save more than £4,000 a year?
The rules say you can only save up to £4,000 a year in a LISA. But you could still open a cash ISA, stocks & shares ISA and/or innovative finance ISA for the remainder of your allowance (or even split savings between all three).
In 2017/18 (and 2018/19) the ISA allowance is £20,000, meaning you could save whatever is left after your LISA contributions up to that limit. For example, if you save the maximum £4,000 in the LISA, you've still got £16,000 worth of allowance to use up in one or more of the other types of ISA.
I'm not from the UK, or I'm currently living overseas. Can I open a LISA?
You need to be living in the UK when you open the account and pay in to it (unless you're a crown employee on an overseas posting, or the spouse/civil partner of one). It doesn't matter if you're a UK citizen or not.
If you then move abroad, you'll need to stop paying into the ISA – unless you're a crown employee.
If you permanently emigrate away from the UK, the normal withdrawal rules apply. You'll need to use the funds for a UK residential property (not buy to let, so this will be difficult), wait until you're 60 and withdraw it then, or pay a 25% penalty to access the cash early.
You must be aged 18 or over but under 40 when you open a Lifetime ISA
Anyone aged 18 to 39 can open a LISA. For (grand)parents wanting to help their (grand)kids buy a home, giving them cash to put in a LISA is a great way to do it.
Those pushing 40 need to be speedy – make sure you open one before you hit the cut-off age.
Once you're over 40, you can continue to save into the LISA until the day before your 50th birthday. And, if you want to transfer it to a new provider, for example to get a better interest rate, this is allowed – and then you can add to it. You can't just open another for new money only.
As always when there's an age limit, some will miss out. For the many people who've asked us "Isn't this age discrimination?" the answer is yes, it is. However, it is not illegal age discrimination; no more than setting a state pension age is. Bear in mind that the Help to Buy ISA also gives a 25% bonus (though on a smaller amount) and has no upper age limit. Also see our Top Savings, Top Cash ISAs and Pension Savings guides.
Can I open a LISA for my son or daughter?
Sort of. ISAs are individual products, so your children will need to open their own LISA once they're 18 or over. Yet you can give them money to put in it. It's worth noting if they're younger, a Help to Buy ISA can be opened from age 16, so you could start there.
If they'll turn 18 within the 2017/18 tax year, they'll be able to roll their Help to Buy ISA savings into a Lifetime ISA (see How to transfer a Help to Buy ISA into a Lifetime ISA below). If they'll still be 17, this option's not open – any transfers will just be treated as a normal payment of money into the LISA if they do transfer once they turn 18, and will count towards their £4,000 LISA allowance for that year.
Many worry about the tax implications of giving money. But gifts aren't taxable; you can give money to anyone you choose (as long as it is a genuine gift and not in lieu of some service). The only caveat is if you die within seven years there can be inheritance tax on it.
Can I keep saving in a LISA once I'm over 50?
No. The regulations say you can't contribute into a LISA once you hit 50. So between ages 50 and 60 you'll still be able to earn interest on the amounts you've saved before you were 50 (similarly, if it's invested, you'll benefit from any investment growth) but you can't put any more in.
You'll also be able to transfer the money between different ISA providers to up the rate, whether it's saved or invested. However, unless you use the funds to buy your first home, you won't be able to access the money in your LISA for retirement income until you're 60 (unless you forfeit all the bonus payments accrued on that cash and pay a penalty on top).
After the first year, withdraw the money for owt else and you pay a penalty (unless you die)
You can take some or all of your cash out of a LISA before age 60 even if you're not buying a property. In the first year that LISAs are available (so until 5 April 2018) there is no penalty for doing so; then again you won't have got the bonus either as that's only paid at the end of the first year. NB – if withdrawing in the first year, you can't make partial withdrawals. You'll need to take all your cash and close the account.
After that it'll usually cost you – so it's best to try to only use the LISA if you're sure the cash is for one of the two defined purposes – first-home purchase or retirement.
Withdrawals for other reasons have a 25% penalty, equivalent to a loss of just over 6%. At first glance the fact you've had a 25% bonus added and then a 25% penalty would leave you back where you started. Yet unfortunately the maths doesn't work like that...
... Imagine you saved £1,000 in April 2017. At the end of year one (so April 2018), you'll get a £250 bonus, so you've £1,250 total (ignoring interest, for ease). If you withdrew it, and closed the account, the 25% penalty would be £312.50. So you'd get £937.50 back.
The way the maths works out is withdrawing for reasons other than LISA purposes loses you 6.25% of what you contributed.
You don't pay the withdrawal charge if you die or are terminally ill. There is provision in the LISA rules so that if you have less than 12 months to live, you retain the bonus with no penalties. If you die, any LISA money including interest and bonuses is passed on to your beneficiaries without penalty, though it'll no longer be in an ISA wrapper, and will form part of the estate for inheritance tax purposes.
What happens to my ISA allowance when I die?
When you die, if you're married or in a civil partnership your partner gets a one-off increase in their (normal, not Lifetime) ISA allowance equivalent to what you had in all ISAs combined (including LISAs). They get this whether or not you leave the ISA money to them.
If you're not married or in a civil partnership, the allowance doesn't pass to anyone.
Will I be able to borrow from the LISA if I pay it all back?
The Treasury may allow penalty-free withdrawals in future if the 'borrowed' funds are fully repaid, but you can't do this right now.
Once it's opened, you're not locked in – you're free to transfer it to another provider
Once you've got the LISA open you don't have to stick with the provider you pick at the start.
As with normal ISAs, interest rates will go up and down – you'll need to keep an eye on it, and be ready to transfer between different LISA providers to up the rate if you see a better deal.
The same is true with stocks & shares LISAs: you may decide to change your investment priorities, in which case you'll be allowed to move it.
You can hold more than one LISA at any one time, provided that you only pay in to one at any time in each tax year (you can transfer the current year's money around, provided it's ALL transferred each time).
You can open and contribute to a cash ISA and a Lifetime ISA
The overall ISA limit is £20,000 in the 2017/18 tax year. You are allowed to split this between a LISA (up to the maximum £4,000) and put the remainder in a cash ISA, stocks & shares ISA and/or an innovative finance ISA (for peer-to-peer investing) in the same tax year.
You're also allowed to have a Help to Buy ISA and a LISA, though you can't get the first-time buyers' bonus on both (see Help to Buy ISA vs LISA info below). But you could get the Help to Buy ISA bonus for a home and then use the LISA and its bonuses for retirement.
Can I transfer cash from other ISAs into my Lifetime ISA?
Yes, if the provider allows it. Even then though, you can only transfer £4,000 from other ISAs into the LISA in any one tax year (excepting the 2017/18 tax year when there's a special exemption to allow you to transfer any savings in your Help to Buy ISA to the LISA too).
As with any ISA transfer, anything you've moved from previous years' ISAs does not affect your overall current tax year's contribution.
For instance, if you transferred £4,000 into a LISA from a previous year's ISA in the 2017/18 tax year, you'd still be able to deposit £20,000 into a cash ISA, stocks & shares ISA or an innovative finance ISA (or a split between two or three of these) within the same tax year, though you'd have used up your LISA allowance for that year.
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The Lifetime ISA need-to-knows for first-time buyers
A first-time buyer is someone who's NEVER owned a property anywhere in the world before
If you've owned before – whether inside or outside the UK – you don't count. This includes owning a property (or a share of one) that you inherited, even if it was sold straightaway and you didn't live there. If you owned a company or had a trust that owned residential property that you are (or were) able to live in, you're also not considered a first-time buyer.
Quick 'Do I count?' questions
I'm a beneficiary in a will through which I'll receive a property in future. Am I a first-time buyer?
Yes. At the moment, you are a first-time buyer as the person leaving the property to you is still alive.
However, if the worst were to happen, and they died before you had used the LISA savings for your first property purchase, then you wouldn't be able to put the LISA savings towards the property purchase without paying the 25% withdrawal charge, as you wouldn't be a first-time buyer at that point.
Effectively, you'd need to keep the cash in the LISA until you were 60 and could withdraw penalty-free, or you'd need to be prepared that you may get less back than you put in.
I invest in property through peer-to-peer schemes. Am I a first-time buyer?
You probably still count as a first-time buyer, as it's likely that the schemes you're investing in don't allow you the right to live in or occupy the properties you're investing in.
You must be buying a residential UK property to live in that costs £450,000 or less
To get the bonus you'll just need to buy a property that costs £450,000 or less with any residential mortgage (not buy to let). That includes Right to Buy, shared ownership, self-builds, and Help to Buy loans. The LISA is intended to help you buy your first home, so you're not supposed to rent it out. For exact rules, see Martin's 'Can I rent my property?' blog.
If you put the money in a LISA and don't qualify to use it for a property (eg, the property you want is more than £450,000), you'll have to pay the penalty to withdraw it or you can keep it for use once you hit 60. So think seriously about whether this could happen to you first.
You can get the money in time for exchange on your property, meaning you can use it towards the deposit requested by the person you are buying off (the exchange deposit), as well as the deposit the mortgage company will want on the property at completion. See the difference between these.
How do I actually buy a home with a LISA – who does it?
When buying, ask your LISA provider to transfer the cash directly to your conveyancer/solicitor, not to you. If you do withdraw it to an account in your name, you'll pay the 25% withdrawal charge. All funds, including the bonus, will be available to use at exchange, provided the bonus has been paid in time.
How quickly do I need to buy after withdrawal?
The purchase needs to complete within 90 days of withdrawing your savings from the LISA. See how buying a home works.
If your purchase is going to take longer, delay taking the money out of your LISA, or ask your solicitor/conveyancer to write to HM Revenue & Customs to get an extension.
What happens if my purchase falls through?
Don't worry, you won't lose out. In this case, the funds go back to the LISA account they came from. This won't affect your annual contribution; you'll still be able to contribute up to £4,000 that tax year (unless you already have).
Is there a minimum mortgage amount or term to use the LISA?
No, the only criteria is that you buy with a residential mortgage (so not buy to let). However, if you could be a cash buyer, and are just getting a mortgage to be able to use the LISA, do the maths to make sure it's worth it.
Most lenders have a minimum lending amount, often £20,000 or £25,000, so you'd need to borrow that much. You'd also need to pay for a lender's valuation and legal work when purchasing the property, and the mortgage you get may have early repayment penalties if you plan to pay off the entirety of the mortgage in the first months of it.
If you plan to do this, always ensure that the amount you get from the state bonus is more than the mortgage will add to your purchasing costs over being a cash buyer.
I'm a cash buyer. Can I use the LISA?
If you're lucky enough to be buying your first property with cash, you'll pay the withdrawal charge to access your LISA savings (unless you're over 60) as you need to be buying with a mortgage to use the LISA and bonus.
Can I use the LISA for a self-build property?
Yes. You'll be able to put LISA savings, including the bonus, towards the purchase of the land for a self-build property, provided you still meet the other criteria (ie, the land's in the UK, you're buying it with a mortgage, it costs £450,000 or less and you complete within 90 days of withdrawal; further, that the home you intend to build is your first home and you intend to live in it).
The Treasury advises that if you're in any doubt about whether a LISA can be used, your solicitor should be able to help.
Can I use the LISA if I'm buying a property at auction?
Yes, provided you still meet the other criteria. However, you won't be able to use it towards the deposit the auction house requires upfront.
If I have a shared ownership property, can I use the LISA to 'staircase up'?
If it's just you wanting to 'staircase up' the amount you own, you can't use a LISA as you already own a share of a property.
Yet if you have a partner who's a first-time buyer, and meets all the other requirements above, they will be able to use the LISA and bonus to help you staircase up. Note that your partner will need to be named on the title deeds of the property to show they have used their LISA and bonus towards the purchase.
Each person has their own LISA, so couples can have one each
If you're planning to buy a home together, it's important to understand that there's no such thing as a joint LISA: you and your partner/spouse need to open separate ones. To make it plain:
- If you're a first-time buyer making a purchase with someone who's owned before – you can still open one and use it towards a home purchase together.
- If you're both first-time buyers buying a property together costing £450,000 or less – you can both open one and save in it, effectively doubling the bonus. Note: even if you're both using the LISA, the £450,000 limit is strict. It doesn't double because you're both using the LISA cash.
You need to have the LISA open for a year or more to be able to use it for a home
This is crucial. You need to have had the LISA open for at least 12 months to be able to use it (and the bonus) towards your first home. If you need to buy within a year, use a Help to Buy ISA instead.
It's worth bearing in mind that if you open multiple LISAs, each one needs to have been open for more than 12 months to qualify. However, there's a way around this. Simply transfer all the money into the oldest one before you buy – then it all counts.
Or you can keep the clock ticking by rolling all your LISAs into one, year after year. So if you opened a LISA in April 2017, you could transfer it to another provider in April 2018 and even though the original account would no longer exist, you'd still be able to use your LISA for a home, as the transfer kept the 12-month count running.
Wannabe first-time buyer? Even if you've no savings, open a LISA ASAP with the minimum, to start the clock
As you must have had a LISA open for a year to be able to use it for a first home, anyone with even an inkling of being a first-time buyer should open a LISA as soon as possible, with the bare minimum (can be just £1) just to get the clock ticking – in case you want to add to it later.
If you then don't end up buying a property, or you buy one that's over £450,000 or overseas, for example, then you can just withdraw the £1 and you'll only have lost out by about 6p.
Lifetime ISAs tend to beat Help to Buy ISAs, but offer less flexibility
The Help to Buy ISA was launched in December 2015, and like the LISA, it has a 25% bonus that's added to what you save, if you use it towards a first home.
- You can have a Help to Buy ISA and a LISA.
- However, you can only use the bonus from one of them towards buying a home.
- Use the LISA for the 25% bonus to buy a home and you won't get the bonus with the Help to Buy ISA, but you can still keep and use the money plus the interest.
- Use the Help to Buy ISA for the 25% bonus and you'd have to pay a penalty to use your LISA savings for a property. Though you'd still be able to use it (and any bonuses) for retirement savings.
While the LISA allows you to save more, the Help to Buy ISA wins for some as our table shows:
Lifetime ISAs vs Help to Buy ISAs – which wins?
Lifetime ISA (for home purchase) Help to Buy ISA Max contribution? £4,000/yr £2,400/yr (£3,400 in year one) Lump sums? Yes No, need to save monthly Max bonus? £33,000 (assumes max contribution every year from 18-49) £3,000 (assumes max contribution over four years and eight months) When's the bonus paid? First year's bonus paid in April/May 2018; after which it's paid monthly On completion when you buy a home Investment option too? Yes, via stocks & shares LISAs No. Cash savings only Max property price? £450,000 £250,000 (£450,000 in London) How quickly can you use it? After the LISA's been open 12mths Once you've £1,600+ saved (can be done in min 3mths) Who can open it? Anyone aged 18 to 39 Any first-time buyer aged 16+ What can it be used for? The home deposit and mortgage deposit Just the mortgage deposit Can I withdraw money if not buying a home? Yes, at age 60+; if earlier you don't get the bonus and will pay a penalty Yes, at any time, you just don't get the bonus
Hopefully the table gets you there. If not, in summary...
- If you'll DEFINITELY buy a home, for less than the LISA maximum of £450,000, are aged 18 to 39, and you won't do it within a year, go for a Lifetime ISA as you will get a bigger bonus.
- If you are older, NEED TO BUY QUICKLY or you're not 100% sure you'll buy at all then it's safer to stick with (or get) a Help to Buy ISA.
You can transfer a Help to Buy ISA into a LISA, but if you're going to, do it soon to max the benefits
If you've decided the Lifetime ISA's a better bet for you than the Help to Buy ISA, you'll need to get a move on to transfer your Help to Buy ISA in before the end of the 2017/18 tax year. Transfers are an area many find confusing so let's try to break it down a little...
Transfer a Help to Buy ISA into a LISA by 5 April 2018 and a special rule means you get the bonus on BOTH. Transfer your Help to Buy ISA into a LISA by 5 April and you'll get the bonus on that, as well as this year's LISA savings.
Special case if you've a Skipton LISA. If you opened a Skipton cash LISA, you needed to have started a transfer in of your Help to Buy ISA by 2 March 2018 to be able to do it in the 2017/18 tax year.
If you missed the deadline, there may be a chance - you could open a stocks & shares LISA, then transfer in both the Skipton LISA (to keep the one-year clock running) and your Help to Buy ISA. However, ISA transfers can take up to 30 days, so check with the stocks & shares LISA provider, plus your existing LISA & H2B ISA providers, that they will be able to get the transfers sorted in time.
The special rule means that, for any Help to Buy ISAs transferred into LISAs by 5 April 2018, all the money you had saved in the Help to Buy ISA up until 5 April 2017 counts as 'extra' and qualifies for a bonus, along with up to £4,000 you put in your LISA in the 2017/18 tax year.
Just to be clear – anything you've saved this tax year, 2017/18, in your Help to Buy ISA WILL count towards this year's £4,000 LISA limit if it's then transferred in. For example, if you put £1,000 in your Help to Buy ISA this tax year, so on or after 6 April 2017, and you're about to transfer it into a LISA, you'll only be able to add £3,000 more to your LISA. See how this works in practice.
Many of you have emailed us with situations like the following, asking what counts towards what allowance, and what gets the bonus. Hopefully this helps to explain...
Helen Homebuyer opened her Help to Buy ISA in December 2015. She saved the max £1,200 in the first month, and £200/mth since. In April 2017, she had £4,500 in her Help to Buy ISA (including interest). She's kept saving £200/mth during the 2017/18 tax year in the Help to Buy ISA since it has a good interest rate and at February had £6,400 (£6,200 of contributions and £200 interest).
Helen opened a cash LISA with £1 in June 2017. She'll then transfer in her Help to Buy ISA to the cash LISA in February. She's paid £1,800 into the Help to Buy ISA in the 2017/18 tax year, and got £100 interest paid, so that counts towards her LISA allowance, meaning she has £2,099 of allowance left (£4,000 - £1,800 - £100 interest - the £1 she put in her LISA already). She pays this amount into her cash LISA in March/April 2018 from other, non-ISA savings to max it out at the £4,000 limit (having kept it in a high-interest bank account in the meantime).
At the end of the 2017/18 tax year, she gets a £2,125 bonus (£1,125 on the £4,500 saved before 5 April 2017 in the Help to Buy ISA and transferred in, plus £1,000 on the combined amount paid into the Help to Buy ISA and the LISA in the 2017/18 tax year). Her LISA clock started in June 2017, so she'll be able to use the cash to buy her first home after June 2018.
The bonus will be added a few weeks after the end of the 2017/18 tax year (so around the start of May 2018; Skipton has confirmed it'll pay them out by 4 May).
Transfer your Help to Buy ISA into a Lifetime ISA after 6 April 2018 and it WILL eat into your LISA allowance. Seems unfair, but the 'loophole' to get the bonus on both only counts in the 2017/18 tax year.
Transfer in after this and your Help to Buy ISA will eat up your 2018/19 £4,000 LISA allowance.
What if I've transferred in my Help to Buy ISA, but I end up buying before April 2018?
As we're getting so close to the end of the tax year, you'll know by now if this is likely to be the case. As we say above, in the first year of the LISA (2017/18), you can withdraw funds penalty-free, as no bonus has been paid yet. This includes any transferred in Help to Buy ISA funds.
But there's a special case for claiming a state bonus in this scenario. In fact, you'll still be eligible to claim the bonus on the Help to Buy ISA part, as provided you transferred it into a LISA (as opposed to shutting the account), you have a one-off 12-month window to use your Help to Buy ISA closure document – the provider will have given you this when you transfer – for your conveyancer to claim the Help to Buy ISA bonus.
One thing to note is that as you'll be claiming the Help to Buy ISA bonus, your home purchase needs to meet the Help to Buy ISA rules rather than the LISA rules – which'll be a problem if your property costs more than £250,000 and is outside London. The other thing is that you'll get the cash at completion – it won't be available at exchange. See Help to Buy ISAs for the full scheme rules.
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The three Lifetime ISA need-to-knows for retirement savers
You can only access your LISA funds at age 60 – so you need to be in for the long haul
Even for the oldest people who can get a LISA, 60 is two decades away. The rules could be changed within that time, for good or bad – like any form of retirement savings. Here's how they stand now...
- You can access the cash on or after your 60th birthday. Then use it for whatever you like.
- You don't have to take it all at once. You can make partial withdrawals.
- If you leave it in the LISA it will still continue to get interest or investment growth/loss. The LISA doesn't simply stop at age 60; it'll still be an active product.
- You don't pay tax on the cash. All money taken out of a LISA for retirement is tax-free.
- LISA savings will affect your eligibility for benefits. Unlike a pension, which isn't counted as savings for means-tested benefits, the LISA will affect your eligibility for them. So you could have to pay to withdraw your LISA retirement savings and live off those until your savings are down below the means-testing threshold. Similarly, they count as assets in bankruptcy or divorce cases.
WARNING! Unless you're a self-employed basic-rate taxpayer, using a pension to save for retirement is likely to be far better than a LISA
The LISA is designed as an option for saving for retirement, just like a pension. Some will see it as an alternative; others will see it as a complementary measure, as you can have both. But the two are very different beasts.
With a pension you save from gross (pre-tax) income. So, as a basic-rate taxpayer, to save £100 only costs you £80 from your pay packet, as that's all you would've received.
With a LISA you save from net (after-tax) income. So, to put £80 in costs you £80. However, if 25% is added to it, that means you've got £100.
So on the surface the amount you put in and get are pretty similar for basic-rate taxpayers. But it does get more complex than that...
Where a pension usually beats a LISA
- If you're employed, auto-enrolment means your employer has to match some of your contributions in a pension; they don't in a LISA. This is a big advantage of pensions, and one that easily trumps a LISA.
- You may also get national insurance and salary sacrifice gains from a pension through an employer.
- Higher-rate taxpayers get relief at 40% in a pension. So to contribute £100 only costs them £60 – easily beating a LISA.
- Saving in a pension doesn't impact your benefit entitlement; saving in a LISA does. If you became unemployed, you may need to withdraw your LISA savings (and pay the 25% withdrawal charge) before you'd be eligible to claim some means-tested benefits – leaving you nothing for retirement.
- Savings in a LISA are counted as assets in bankruptcy cases, so you could be forced to cash in early. Pensions are usually protected.
- You can currently take money from pensions from age 55 (this will rise slowly to 58); you need to be 60 to use LISA savings without penalty.
Where a LISA usually beats a pension
- When you take your pension (see how to take your pension) you can only take 25% of it as a tax-free lump sum – the rest you pay income tax on (at your marginal rate). However, withdrawals from LISAs are totally tax-free.
- Apart from with critical illness and death you can't ever take cash out of a pension early, but if you're prepared to take a 6% hit, you can withdraw money from a LISA.
- Some pensions for workers employed by the state, eg for NHS workers, can only be claimed in full at state pension age (though a reduced amount can be claimed earlier). If this applies to you, a LISA can beat a pension in terms of early access.
As a general rule though, a pension will likely beat a LISA as a first place to save for retirement funds for anyone who is employed (due to the employer's contribution) and anyone who is a higher or top-rate taxpayer. As this is complex, here's a table which may make it easier.
Lifetime ISAs vs pensions – which wins?
Lifetime ISA Pension – basic-rate taxpayer Pension – higher-rate taxpayer Employer contribution None Yes – 1-3% of salary (see auto-enrolment) Yes – 1-3% of salary (see auto-enrolment) State contribution 25% 25% (tax relief) 66% (tax relief) Max amount you can you save/yr? £4,000 £40,000 (max amount with tax relief) (1) £40,000 (max amount with tax relief) (1) When is bonus/tax relief paid? First year's bonus paid in April/May 2018; after which it's paid monthly Immediately (2) 25% paid immediately, rest must be claimed (2) Who can open one? Anyone aged 18-39 Anyone aged 16+; parents can open one for you from birth Anyone aged 16+; parents can open one for you from birth When can you access it? Age 60 (accessible before for a penalty) Age 55 Age 55 Do I pay in from pre or post-tax income? Post-tax income Pre-tax income Pre-tax income What tax will I pay on withdrawal? Tax-free 25% tax-free, rest taxed at your income tax rate 25% tax-free, rest taxed at your income tax rate Liable for inheritance tax? Yes No No Affects pre-pension-age benefits entitlement? Yes No No Can be taken to pay creditors in bankruptcy? Yes No No
(1) You can carry unused allowances over from previous years, meaning that technically you could contribute up to £160,000 in the 2017/18 tax year. However, you'd need to earn at least this to get this much tax relief. For a fuller explanation of the annual allowance, see 17 pension need-to-knows. (2) Unless you contribute by salary sacrifice in which case the saving's made by paying in from pre-tax income.
A little aside...
Not to do with your choice, but it's worth taking a look at the cleverness behind this from the Treasury. If people use a LISA rather than a pension, the Treasury gets tax revenue now, as savings come from taxed income. If people put it in a pension, the Treasury has to wait years to get tax. So this could be the current Chancellor grabbing cash out of future Chancellors' pockets.
The longer you're likely to keep the LISA, the more you should consider share-type investments
The LISA gives you two savings options. The main one for first-time buyers will be cash LISAs which is where you put the money into the equivalent of a savings account, so your capital (the sum you put in) is safe and you get a defined amount of interest on top.
Yet if you're saving for retirement it's also worth considering investment LISAs – where the money is invested in stocks and shares (or funds) and performance depends on how well your investments do. Here you're taking a risk that you may lose some cash in the hope that it will grow faster.
Which you opt for will depend on your attitude to risk and reward, though as a rule of thumb, you should be looking to invest for at least five years if that's your choice. This allows enough time to ride out any bumps in the market that might see you make a loss.
If you're saving for retirement and you've more than five or 10 years to go, the general wisdom is it's worth taking some risk at that point and looking at the higher rewards that investing in the market can bring – though it comes with the risk of losing money if stock markets (or companies you hold shares in) tank.
But, if you're a bit more cautious, you could open a cash LISA one year, and a stocks & shares LISA the next year (remember, you can hold more than one LISA at a time, you just can't usually open and pay in to more than one in the same tax year).
Are my savings safe in a Lifetime ISA?
With cash LISAs, the only risk is the slight one of the bank or building society going bust, though you get up to £85,000 protection from the Financial Services Compensation Scheme (FSCS).
The only thing to watch is that this is by banking institution, not per account. So if you have other savings in the same place as your LISA savings, it could take you over the limit. If so, see our Savings Safety guide for more info.
If you've a stocks & shares LISA, you have investment risk – the value of the investments you hold could go up or down. A totally different FSCS protection applies here...
Investor protection is about providers going bust, NOT you losing money
The FSCS investment protection applies if you lose money due to the product provider of the investment going bust – eg, if you've a stocks & shares LISA with a bank, and the bank goes bust – not if the underlying investment goes bust.
In other words, if you've shares in a company and it goes kaput, or you've bought a fund and it performs poorly, you've no protection as that's the nature of investing.
Yet in many cases if you're buying shares or funds through a company – eg, some stockbrokers just sell you shares – the fact the stockbroker went bust wouldn't actually matter. You'd still own the shares, so there'd be no compensation.
In general, if you are due compensation, you'd get 100% of the first £50,000 back.
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Best BuysThe top Lifetime ISAs
Top cash Lifetime ISAs
Only one provider so far is offering a cash LISA...
The first (and only) cash LISA, though interest rates are low
Skipton Building Society - 0.75% AER variable
The Skipton Lifetime ISA is the only cash LISA currently available. The interest rate's low at just 0.75%, though of course you'll get the 25% state bonus on top.
If you're transferring in a Help to Buy ISA (or any other ISA) in to the Skipton LISA, you needed to have applied to transfer by 2 Mar 2018. Transfers will reopen in the new tax year.
- Interest rate: 0.75% AER variable | Interest paid: Annually
- Min pay-in: £1 | Max pay-in: £4,000/yr
- Access: Online only
- Can I transfer my Help to Buy ISA in? Yes, though transfers are now shut for the 2017/18 tax year
- FSCS protection: Full £85,000 UK savings safety guarantee. See Savings Safety.
Top stocks & shares Lifetime ISAs
Ultimately with stocks & shares LISAs, what counts is what you choose to invest in, and there are a lot of different investment choices. We don't cover which investments are best for you, so here are the main details of the platforms currently offering stocks & shares LISAs.
Stocks & shares LISAs are much riskier than cash LISAs by their very nature. So there are two things to remember before going down this route:
1. IMPORTANT! If you invest, your capital is at risk. As with any investment, the value of your funds can go down as well as up, and while it's unlikely, you could lose all your money.
2. Always keep an eye on fees. Because even small fees year after year can eat into your investment.
Lifetime ISAs with wide range of investment choices
These two providers allow you to choose from tens of thousands of investment options, from shares to funds, ETFs and more. While you can opt for simple, fully managed funds where you put your money in and investment decisions are made for you, these platforms may be more suitable for experienced investors.
If you're not sure, or overwhelmed by choice, then the three 'simpler' LISAs below may be more suitable, as they come with a limited range of funds you can invest in, and tend to be fully managed as standard.
Lots of choice, so best for more experienced investors. Slightly lower base fees than HL below
AJ Bell Youinvest
AJ Bell Youinvest is a major investment provider, and though its Lifetime ISA is quite new, it's been a top pick for its stocks & shares ISA for a while. AJ Bell's LISA gives a solution to experienced investors – who can pick from shares, ETFs, funds & more.
If you're less experienced, you can go for one of its passive funds (which have different risk levels, from cautious to adventurous), where you buy into a fund where AJ Bell manage the composition on your behalf. Or, you could try exchange-traded funds (ETFs) which track a chosen index, eg the FTSE-100, where the fund manager aims to mirror the performance of that index.
If you're looking for no risk, you can keep your money as cash, though you'll only get interest if you've above £50,000, and then only 0.05%. If this is what you're looking for, the cash LISA above is much more suitable.
One thing to watch out for is that this LISA could have high transfer fees. It charges a £25 fee per holding to transfer to a new provider – fine if you're in one fund, but potentially expensive if you've several different funds or share holdings.
- What can I invest in? Thousands of different investment choices, incl shares, funds, investment trusts, bonds exchange-traded funds.
- Min investment: £500 lump sum or £25/mth | Max investment: £4,000/yr
- Annual fees: 0.25% as a base, though it depends what you invest in. See all charges.
- Can I transfer my Help to Buy ISA in? Yes
- Exit fees: No exit fee
- Transfer fees: £25 per holding to transfer (transfers out as cash are free)
Similarly huge choice of investments as AJ Bell, though slightly higher base fees
Hargreaves Lansdown* is a major investment provider, and popular with investors for its large range of choices – more than 13,500 different options. With Hargreaves, you can be as involved as you want, from choosing your own shares and funds and making up a portfolio, to opting for single funds where the fund manager chooses the investments.
If you're looking for low risk, Hargreaves Lansdown says you can leave your money in a 'cash park' (basically holding it as cash), though you'll only get 0.05% interest and that's only if you've £5,000 or more (plus, by definition, won't get growth on your investment). Again, if you don't want risk, the cash LISA above is likely to be more suitable.
Again, you could pay relatively high fees to transfer out as there's a £25 per holding fee to transfer out. Fine if you've one or two different holdings, but could get expensive if you've significantly diversified.
- What can I invest in? 13,500 investment choices, incl shares, funds, investment trusts, exchange-traded funds.
- Min investment: £100 lump sum or £25/mth | Max investment: £4,000/yr
- Annual fees: 0.45% as a base, though it depends what you invest in. See all charges.
- Can I transfer my Help to Buy ISA in? Yes, though transfers are now shut for the 2017/18 tax year
- Exit fees: £25 + VAT
- Transfer fees: £25 per holding to transfer (transfers out as cash are £25)
Simpler Lifetime ISAs with a limited choice of funds
The two Lifetime ISAs above tend to be more for those who are confident in choosing their own funds, and happy to take a more hands-on approach to managing their stocks & shares LISA. The LISAs below are likely to be more suitable if you want a more simple investment choice, as they tend to have limited numbers of funds, which are designed for different risk profiles.
Low-ish fees, plus Nutmeg can recommend a portfolio based on your attitude to risk
Nutmeg* is a robo-investor, meaning you don't get to choose the exact investments your money goes into. Instead, you can choose portfolios based on your attitude to risk – Nutmeg will ask you questions when you open your account and recommend portfolio(s) to suit the level of risk you're willing to take. This means you can't pick and choose what funds you want in your portfolio, though it is an easy route.
If you're looking for low risk, Nutmeg says 'portfolio one' carries its lowest risk, being made up largely of bonds, rather than equities which are a lot riskier.
- What can I invest in? Choice of 10 fully managed portfolios, or five 'fixed-allocation' portfolios
- Min investment: £100 lump sum | Max investment: £4,000/yr
- Annual fees: Fully managed portfolio: £0-£100k at 0.75%, fixed portfolio: £0-£100k at 0.45%. Investment fund costs (average): 0.19%.
- Can I transfer my Help to Buy ISA in? No
- Exit/transfer fees: None
Invest into one of three fund choices, plus Moneybox can 'round-up' daily spending to invest
Moneybox is an app that lets you invest from as little as £1. You can make weekly or one-off deposits into one of three investment options – cautious, balanced or adventurous. There's also a unique feature called round-ups, where you connect your debit or credit card to it and it automatically rounds up your purchases to the nearest pound, investing the difference (eg, buy a £2.20 coffee and it takes 80p to invest). Any savings you make are taken once a week via direct debit and invested a few days later.
If you're looking for low risk, as its name suggests, the 'cautious' portfolio carries the lowest risk, being made up largely of cash, rather than shares which are a lot riskier.
- What can I invest in? Choice of three investment options – cautious, balanced or adventurous
- Min investment: £1 | Max investment: £4,000/yr
- Annual fees: £1/mth (free for the first 3mths) + 0.45%/yr. Fund manager charges (estimated): 0.22-0.24%.
- Can I transfer my Help to Buy ISA in? Yes, you'll need to post a form to Moneybox once your LISA's open
- Exit/transfer fees: None, though charges £25 per holding for 'in specie' transfers (where you transfer a fund/holding directly to a new provider without cashing it in first – these are rare)
Choice of three portfolios depending on your attitude to risk, but high management charges
The Share Centre
Invest in The Share Centre's Lifetime ISA and you can choose from one of its three 'Ready-made Funds': 'Cautious', 'Positive' or 'Adventurous', based on your attitude to risk. You can pick one when you open your account and do so with just £1. Again, this is a limited choice of portfolios, and you can't decide what goes in them, so be careful if selecting this.
For the risk averse, The Share Centre says there is a 'cash park' while you're deciding which fund to pick, so you could leave money in that, if you wish to, though you won't get interest. Otherwise, the 'Cautious' fund – as the name suggests – has the least risk.
- What can I invest in? Choice of three portfolios
- Min investment: £1 | Max investment: £4,000/yr
- Annual fees: Varies, but typically 2% Cautious, 2% Positive and 2.21% Adventurous
- Can I transfer my Help to Buy ISA in? Yes, must transfer by 29 Mar 2018 for this tax year
- Exit/transfer fees: £25