Cash Lifetime ISA vs Stocks and Shares Lifetime ISA
To save or invest? That’s the question. Turns out, making decisions for your first home starts way before the house-hunting stage. It all begins with which account you’ll choose to build your deposit.
Key Takeaways
- Government Bonus: Both accounts offer a 25% government bonus on your savings, up to £1,000 per tax year.
- Time Horizon: Cash LISAs are typically better for short-term goals (buying within 5 years), while Stocks & Shares LISAs are suited for longer-term goals (5+ years).
- Risk vs. Reward: Cash LISAs offer guaranteed interest but may not keep pace with house price inflation; Stocks & Shares LISAs offer higher growth potential, but your capital is at risk.
Withdrawal Rules: A 25% government penalty applies if funds are withdrawn for anything other than a first home (up to £450k) or retirement.
In this guide
- Save with the market-leading Cash Lifetime ISA
- What’s the difference between a Cash Lifetime ISA and a Stocks and Shares Lifetime ISA?
- How do I choose between Cash and Stocks & Shares Lifetime ISA?
- Can you switch from a Cash Lifetime ISA to a Stocks and Shares Lifetime ISA?
- Can you have both a Cash LISA and a Stocks and Shares LISA?
- Are there any penalties or fees for withdrawing money from a Lifetime ISA?
- Why open a Lifetime ISA with Tembo?
It’s a smart idea to open a Lifetime ISA if you’re saving for your first home because you can score up to £1,000 towards your home every tax year, thanks to the free 25% bonus from the UK government. Plus, there is a choice available. You can save money in a Cash Lifetime ISA or invest with a Stocks & Shares Lifetime ISA.
But how do you decide? Let’s start with the basics.
Save with the market-leading Cash Lifetime ISA
Earn 3.8 % AER (variable) with the Tembo Cash Lifetime ISA, you'll - that's hundreds more in interest towards your house fund vs saving with the closest competitor!
What’s the difference between a Cash Lifetime ISA and a Stocks and Shares Lifetime ISA?
With a Cash Lifetime ISA, you'll earn interest and the 25% government bonus on top of your savings over time. While with a Stocks and Shares Lifetime ISA, your money and the government bonus will be invested in the stock market.
To help first-time buyers decide which one - a Cash Lifetime ISA or Stocks and Shares Lifetime ISA - is right for them, we’ve outlined the pros and cons of each option below.
Keep reading:How to start investing, a beginner's guide.
Pros and cons of a Cash Lifetime ISA
Pros
Saving is a safer option than investing
You earn interest over time. It’s 3.8% (variable) per year (or in finance-speak, AER – annual equivalent rate) with us.
Cons
House prices could go up faster than it takes for you to build your deposit (but hopefully, with our help, that won’t be the case).
Pros and cons of a Stocks and Shares Lifetime ISA
Pros
If the value of your investment goes up, you could buy your home sooner.
Choose the level of control you want. Some providers let you pick where you want to invest, while others do the thinking for you.
Cons
If the value of your investment goes down, you could lose some (or all) of your money and it would take you longer to buy your home. Major buzzkill.
The government bonus and returns are reinvested so the value of these can also go down so you can lose some or all of this as well.
Stocks and Shares Lifetime ISAs often come with additional costs such as fees.
How do I choose between Cash and Stocks & Shares Lifetime ISA?
It can be hard to know whether to simply put your savings into a Cash Lifetime ISA or invest the money instead. To help you decide, ask yourself these two questions:
🕰️ When do I want to buy my home?
To help you decide, use this simple rule of thumb based on your buying timeline:
- Buying in 1-5 years: A Cash LISA is generally safer as it protects your deposit from short-term market dips.
- Buying in 5-10+ years: A Stocks & Shares LISA may be better, as the longer timeframe allows you to recover from market volatility and potentially earn higher returns.
For those unsure when they want to buy their home, the Tembo app can help. Set your budget, tell us how much you can set aside each month (and how much you’ve already put away), and we’ll show you how long it could take to buy your first home.
Capital at risk. Past performance is not a reliable indicator of future results.
💣 How much risk do I want to take?
Saving in a Cash Lifetime ISA can be a risk if house prices go up faster than you can build your deposit, while investing can be a risk if the value of your investments goes down. But typically, investing is riskier than saving - you may get back less than you invested, but you could also see a better return.
Different investments also come with different risk levels. On a scale of 1 to 7 (1 being lower risk with typically low returns and 7 being higher risk with typically high returns) ,the sustainable ESG fund that you invest in with a Tembo Stocks & Shares Lifetime ISA sits at 5.
Save with the market-leading ✨ Cash Lifetime ISA ✨
Save up to £4,000 each tax year and get a free 25% bonus on top of your savings, up to £1,000. Plus, with the Tembo Cash Lifetime ISA, you'll earn 3.8% AER (variable) on your savings - that's hundreds more in interest towards your house fund vs saving with the closest competitor!
Can you switch from a Cash Lifetime ISA to a Stocks and Shares Lifetime ISA?
You may be able transfer your savings from a Cash Lifetime ISA to a Stocks and Shares Lifetime ISA, but this depends on your provider. Right now, you cannot switch from a Cash Lifetime ISA to a Stocks & Shares Lifetime ISA with Tembo.
If you are with another provider and want to make the switch - whatever you do, don’t just close your current Lifetime ISA. When you close a LISA (or any other kind of ISA) and take your money out, you’ll remove it from the tax-free account it's sitting in. Plus, if you withdraw the money yourself, you’ll face the 25% government withdrawal penalty and could lose part of your own money.
Can you have both a Cash LISA and a Stocks and Shares LISA?
Yes! You can have both a Cash Lifeimte ISA and a Stocks and Shares Lifeimte ISA. However, you can only open and pay into one Lifetime ISA each tax year, and the provider you go with may only let you open one Lifetime ISA with them.
So you could have both types of LISAs and alternate which one you pay into each tax year, but you may have to hold the accounts with different providers. That way, one LISA could be used for saving for a first home in the short-term, and the other for long-term saving for retirement. However, you canonly use one Lifetime ISA at once, either when you purchase your first home or to fund retirement.
By saving into a Lifetime ISA instead of enrolling in or contributing to a pension, you may lose out on contributions by an employer (if any), and it may affect your entitlement to means-tested benefits.
Start your journey to homeownership
Open a Lifetime ISA with Tembo today on our award-winning app and join the +350,000 others saving for their first home.
Are there any penalties or fees for withdrawing money from a Lifetime ISA?
Withdrawing funds from a Lifetime ISA for any purpose other than buying a first home or retirement before the age of 60 will incur a penalty. You’ll have to pay a 25% withdrawal charge, meaning you may get back less than you put in. If the home you purchase is above the £450,000 threshold, you will also be hit by the withdrawal penalty as this is classified as an ‘ineligible’ purchase.
Why open a Lifetime ISA with Tembo?
With a Tembo Lifetime ISA, savers get so much more than a government-boosted savings or investment account.
Features include:
- Fee-free access to our award-winning mortgage service, backed by our Best Mortgage Deal guarantee and Tembo RateCheck
- Free, tailored homebuying plan in-app, which walks you through each step to buying your first home
- Free property reports including property valuation, nearby sold prices, floor plans, EPC ratings, schools and more.
- Personalised "Time to Buy" countdown that shows you when you could buy your home
- Gift Links to share with family and friends so they can contribute to your pot on birthdays, Christmas and other special occasions
- ‘Team Up’ — our unique feature where you and your partner (or best friend/family member) can collaborate on the deposit for your first home together. When you both open a Tembo Lifetime ISA, you could get up to £2,000 towards your home every tax year!
- Exclusive in-app content about money, mortgages and the home-buying process.
