What is a Lifetime ISA?

What is a Lifetime ISA?

A Lifetime ISA (or LISA for short) is a type of ISA savings account designed to help you save for your first home (worth up to £450,000) or retirement from age 60. You can save up to £4,000 per tax year in a LISA, and the government will add a free 25% bonus. That means you could get up to £1,000 top-up for free each tax year! Plus any interest you earn if you save into a Cash Lifetime ISA - and as it’s an ISA, that interest is tax-free!

• Who can open a Lifetime ISA? You need to be aged 18 - 39 to open a Lifetime ISA, and be a UK resident (more on this below)
• When can I use my LISA savings? You can use your LISA funds for an eligible house purchase, or for retirement on or after your 60th birthday. If you withdraw the funds before then for anything other than your first home purchase, you’ll be hit by the withdrawal penalty (details below)
• How long do I need to have a LISA? You must have had your Lifetime ISA open for a year to use it (and the government bonus) towards your first home purchase. This time starts from when you first pay into the account.

How does a Lifetime ISA work?

You can save up to £4,000 per tax year into a Lifetime ISA, and the government will add a free 25% bonus (up to £1,000 a year) on top of whatever you save. So if you save £1,000, you’ll get a free £250 top-up; save the full £4,000, and that’s a free £1,000 added to your pot. You’ll also earn interest on your savings if you open a Cash Lifetime ISA, or potential investment growth if you open a Stocks & Shares Lifetime ISA. 

You can only use your Lifetime ISA funds to purchase your first home or to fund retirement. Your home purchase must meet certain criteria, such as being below £450,000 in value and your first home anywhere - not just in the UK. 

You can save up to £4,000 annually until age 50, and the bonus is paid every month that you pay into the account. You’ll only get the bonus on your own contributions, meaning the government won’t add the 25% bonus to interest or investment growth.

Who can open a Lifetime ISA?

You can open a LISA if you’re a UK resident aged 18 to 39. If you’d like to use your Lifetime ISA to buy your first home, you’ll also need to be a first-time buyer. If you’ve already owned property either in the UK or abroad, you can use a Lifetime ISA for retirement. 

If you don’t want to use a Lifetime ISA for retirement, or you’re not a first-time buyer, you might want to consider a Cash ISA instead. You’ll still earn interest tax-free, but you won’t get the 25% government bonus when buying a property. 

What types of Lifetime ISA are there?

There are two kinds of Lifetime ISAs. A Cash Lifetime ISA is a savings account that earns interest (tax-free). Ideal if you plan to buy a home within the next 3–5 years.

With a Stocks and Shares Lifetime ISA, your money is invested in the stock market, which means the value of your LISA savings can rise and fall over time. Stocks and shares tend to outperform savings in the long term (although this isn’t guaranteed), making a Stocks & Shares Lifetime ISA a potentially better choice if you’re using it for retirement. However, it also comes with more risk, and there’s no guarantee that you’ll get back what you put in.

Who offers a Lifetime ISA?

Several UK providers offer Lifetime ISAs (LISAs), but if you’re looking for the market-leading interest rate, look no further than Tembo’s Cash Lifetime ISA. Offering 3.8% AER (variable), you’ll earn hundreds more in interest over 5 years vs saving with the closest competitors like MoneyBox or Plum. Lifetime ISAs for bigger names, such as Skipton Building Society, offer significantly lower interest rates. Plus, as a savings customer, you’ll also have access to Tembo’s award-winning mortgage service fee-free when you come to buy your first home, and the Best Mortgage Deal guarantee.

Are Lifetime ISAs worth it?

If you’re saving for your first home and meet the criteria, a LISA can be a great way to boost your deposit and buy a home sooner. Research into our own customer data showed that first-time buyers who use a Lifetime ISA are able to buy their home four years earlier than those who do not. But many first-time buyers are missing out, as only 1 in 6 use a Lifetime ISA. A lot of this is because people don’t know that this type of ISA savings account is available to them, or they are worried about the withdrawal charge if you take money out for anything other than your first home purchase or retirement. 

However, Lifetime ISAs are an incredible savings vehicle that could help you save up a house deposit years faster. It’s the only savings account that gives you a free 25% government bonus, and because it’s an ISA, you’ll also earn tax-free interest. As long as you only put money into the account you won’t use in emergencies, then could be a worthwhile choice for many aspiring first-time buyers.

Learn more: What is an ISA?

What is the downside of a Lifetime ISA?

While a Lifetime ISA offers major benefits, there are a few limitations to consider:

1. The property cap might limit your options

If the home you’d like to buy costs more than £450,000 or it will do by the time you finish saving, the property won’t be eligible for the LISA bonus. This means you’ll need to:

• Buy somewhere cheaper
• Pay a 25% penalty on the amount you withdraw, or
• Leave your savings in your Lifetime ISA until you turn 60 

However, from our own research, we found that 97% of Lifetime ISA customers were buying an eligible home under the £450,000 price cap!

2. The 25% penalty for ineligible withdrawals 

Any money you put into your Lifetime ISA should only be for your first home purchase or retirement. This is because if you take money out of your Lifetime ISA for any other reason, this will be classed as an ineligible withdrawal, and it’ll leave you with less money than you put in. That’s because not only does the 25% penalty take away any government bonus you’ve earned, it also deducts 6.25% of your initial deposit. 

To avoid this, any money you might need - for example, for emergencies, or travelling - put into a different account so you aren’t dipping into your Lifetime ISA for these costs.

Learn more: When can I withdraw from my Lifetime ISA?

2. Stocks & Shares LISAs come with investment risk

Cash LISAs are generally safer if you plan to buy in the next few years, but over the long term, money invested in the stock market tends to outperform savings. But this isn’t guaranteed. Like all investments, there is a risk the value of your investments will go down as well as up.

FAQs: Lifetime ISA rules & restrictions

How long does a Lifetime ISA last?

You can open a LISA between 18 and 39, contribute until you’re 50, and use the funds from age 60 (or sooner for a house).

Is a Lifetime ISA free money?

In a way, yes. For every £4 you save, the government gives you £1, up to £1,000 a year. But you must use the money for a first home or retirement to avoid penalties.

Can I have more than one Lifetime ISA?

Yes, but you can only contribute to one Lifetime ISA per tax year.

Can I have a Help to Buy ISA and a LISA?

Yes, but you can only use the government bonus from one of them when buying your first home.

Can I transfer a Help to Buy ISA into a LISA?

Yes, it is possible to move money from your Help to Buy ISA to a Lifetime ISA. All you need to do is open a Lifetime ISA and ask the provider to transfer the money across from your Help to Buy ISA. Please be aware this is not a simple transfer because they are different account types, so it's not a direct transfer. You can only add up to £4,000 of your savings each tax year into a Lifetime ISA, which will take you up to the Lifetime ISA’s annual allowance. If you have more than £4,000 in your Help to Buy ISA, you'll have to move this across multiple tax years.

Before making the switch, take a look at our Lifetime ISA vs Help to Buy ISA guide, where we weigh up the pros and cons of each. 

Can two Lifetime ISAs be used to buy a house together?

Yes, you can use two Lifetime ISAs to buy a house as long as you’re buying the property with someone else who is also a first-time buyer. So if you and your partner are buying a house together and you have a Lifetime ISA each, maxing out your accounts for 5 years would see you getting a total of £10,000 off the government towards your first home.

Can I use a Lifetime ISA for a house deposit and retirement?

Yes, you can use a Lifetime ISA for both a house deposit and retirement. However, be aware that when you use your Lifetime ISA for a house purchase, if you withdraw all the funds your provider may automatically close your LISA account. Also, while a LISA can be a good supplement to a pension for many, it is not a replacement, as you may miss out on employer contributions to a workplace pension scheme.
What if my Lifetime ISA isn’t enough?

If you’re struggling to save a full deposit or pass affordability checks, there are other ways to get on the ladder. At Tembo, we specialise in a range of mortgage products and budget-boosting schemes designed to boost your buying power, such as:

Deposit Boost A family member can release equity from their property to top up your deposit.

Savings as Security Also known as a springboard mortgage, this lets a loved one place savings into an account linked to your mortgage as security.

Income Boost Add a parent or family member to your mortgage to increase how much you can borrow. They don’t need to be on the property title.

What if I use my Lifetime ISA for retirement?

You can use your LISA for retirement if you don’t end up buying a home. The 25% bonus continues until you’re 50, and you can access the funds from age 60 without penalty. Your money will continue to earn interest (in a Cash LISA) or investment returns (in a Stocks & Shares LISA) in the meantime.

Many self-employed people use a Lifetime ISA as a way to save for later life, especially if they don’t have a pension through work. Just remember, private pensions come with their own tax benefits, so it’s worth speaking to a financial adviser if you’re unsure.