Lifetime Isas: What they are, how they work and the best rates

Saving for a first home or retirement can be more manageable with a Lisa, but there are conditions

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Lifetime Isas or “Lisas” were first introduced in April 2017, as then-chancellor George Osborne’s offering to help first-time buyers and future retirees grow a tax-free nest egg in one fell swoop.
It was a clever move, offering help to both young people who needed help to get onto the housing ladder, and offering an alternative to a pension to those saving for the longer-term.
Savers aged 18-39 are able to open a Lifetime Isa, where money can be held as cash or invested in stocks and shares. You can deposit up to £4,000 in each tax year – what you pay in will come out of your £20,000 Isa allowance – and the big incentive is the Government adds a 25pc bonus up to a maximum £1,000 a year. You can carry on saving money until you turn 50.
Money can only be withdrawn either to buy your first home, or to use in retirement after the age of 60. Taking money out for any other reason (other than being diagnosed with a terminal illness) will trigger a withdrawal penalty, which not only removes the government bonus, but some of your own cash, too.
Cash Lisas work in the same way as other cash Isas: you’ll earn a variable rate of interest that remains tax-free while it’s held within an Isa.
If you’re planning to save money held in a Lisa for a longer period of time – at least five years – an investment account might be more suitable and could see you make bigger returns (although this isn’t guaranteed).
Some investment Lisas, such those offered by Nutmeg and Moneybox, have the option to put your money into a ready-made portfolio. This means that the platform selects what you invest in, so you don’t have to. Given there’s more input from the provider, these accounts can come with more fees. Nutmeg fees, for example, are 0.75pc up to £100,000, with 0.35pc on anything over. Fully managed fund costs are 0.22pc, and there’s a market spread fee of 0.4pc-0.9pc.
If you prefer a more DIY approach, providers such as AJ Bell and Hargreaves Lansdown give you the flexibility to choose for yourself.   
The best cash Lifetime Isa rates are shown in the table below:
Given that the cost of retirement is on the rise, a Lisa can offer a way to save for when you’re over the age of 60. It could be used as well as, or instead of a private pension, but there are some key differences to be aware of.
Parents can open pensions for their children, and other people – such as grandparents – can pay into the account. Lisas, on the other hand, can only be opened by the saver, and they’re also the only ones who can make deposits. 
For parents or grandparents wanting to help their younger relatives save for the future, they can only give money and assume it will be transferred into the account.
The money you pay into a Lisa will have already been taxed (unless you’re not a taxpayer). While money is held within the Lisa, any growth will be free from tax. This includes a cash Isa’s savings interest, which could otherwise be liable for income tax, and a stocks and shares Isa’s investment growth, which could otherwise trigger capital gains tax and dividend tax.
Tax benefits for pension savings come when you pay in the money, thanks to pension tax relief. However, the funds become taxable when you come to draw down the money.
For each £1 you pay into a Lisa, you’ll get 25p “free” from the Government. That’s in addition to any savings interest or investment growth. 
A pension can be more lucrative, thanks to the tax relief paid on your contributions – this is based on the highest rate of income tax you pay, meaning basic-rate taxpayers get 20pc tax relief, and those who pay higher-rate tax get 40pc. It means contributing £100 to your pension only costs you £80 as a basic-rate taxpayer, but for a higher-rate earner it would only cost you £60 to contribute that amount.
For a basic-rate taxpayer the “free” money is the same in a Lisa or a pension. But once you become a higher or top-rate taxpayer, a pension will win out.
Employees will benefit even more. Under auto-enrolment rules, employers must contribute at least 3pc to employees’ pensions – many will pay in more, and match or even exceed your contribution. What’s more, if you pay in via a salary sacrifice scheme, you’ll also get National Insurance relief, in addition to income tax relief.
The most that can be paid into your Lisa each year is £5,000, made up of £4,000 from you and £1,000 in government bonuses. At most, this amount can be paid in each year between the ages of 18 and 49, meaning up to £155,000 can be deposited in total. This is not including savings interest or investment growth, which will continue to accumulate while the account is open. 
While this is not an insignificant amount, it’s nothing compared to what you could save with a pension – this savings vehicle could even see you become a pension millionaire.
Pensions can grow over a much longer period of time. Accounts can be opened for children, and paid into even beyond retirement age. While you’re still working, and before any withdrawals have been made, you can pay in up to £60,000 a year or up to 100pc of your annual salary – whichever is less. 
Your Lifetime Isa savings can be accessed any time after you turn 60, for whatever you like. You can make partial withdrawals, or withdraw it all – although it will fail to be tax-free if you then pay it into a different account. 
By contrast, you’ll need to wait until you reach retirement age to access your pension savings, which is currently 66. Under pension freedom rules, you can access defined contribution pension savings at age 55 (increasing to 57 in April 2028).
Lisa savings form part of your estate, and therefore come within the scope of inheritance tax. Pension savings haven’t historically been considered part of someone’s estate, but they are due to be brought within the scope of inheritance tax from April 2027.
If you want to buy your first home, your Lisa savings can be used to go towards purchasing a residential property in Britain with a value up to £450,000.
For couples purchasing their first property together, each person can hold their own Lisa, and pool the money from both accounts to buy the same property.
When you’re ready to buy, you’ll need to ask the Lisa provider to transfer your savings to your solicitor or conveyancer. The property purchase must complete within 90 days of the transfer taking place; if it falls through, the funds should be restored to your account, without any penalty being deducted.
Note that you will not be considered a first-time buyer for the purposes of Lisa rules if you’ve inherited or partly owned a property in the past, even if the property is not in the UK.
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If you make a withdrawal from a Lisa for a reason other than buying your first home, when you’re over 60, or if you have a terminal illness, then the withdrawal penalty will be applied.
This is 25pc of the amount being withdrawn. This not only removes the 25pc government bonus, but also 6.25pc of your own money. 
The penalty was temporarily reduced to 20pc during the pandemic, when large numbers of savers sought to access their savings. This meant only the government bonus was deducted, and there were calls to keep the penalty as it was. However, the original penalty rules were reintroduced in April 2021.
You have to hold a Lisa for at least a year before you can withdraw the funds to use towards your first home, otherwise you’ll pay the withdrawal penalty. 
If you’re looking to buy a home sooner, a different type of savings account would likely suit you more – although you will miss out on the government bonus.
As Isa providers have to submit savings information to HMRC each year, the taxman will find out if you exceed the deposit limit. If it thinks you paid in more by accident, it will usually get in touch to explain what you need to do to correct the error (by transferring the excess to a different account, for example), and the extra money will lose its tax-free status, so there might be tax to pay on any growth.
If you have more than £4,000 to save, you can either save into a different type of Isa, or a non-Isa savings or investment account.
Some providers will have automatic mechanisms in place to make sure you don’t exceed the deposit limit. For example, Nutmeg says any money from direct debit payments exceeding £4,000 will be automatically sent to its “Unallocated Cash” pot. It won’t be invested, but instead held until you give further instructions.
The Help to Buy scheme closed to new entrants on November 30 2019. You can keep saving into an account if you opened one before this date and it can be used in conjunction with a Lifetime Isa. 
You can continue to save into a Help to Buy Isa until November 30 2029; the final deadline for claiming a Help to Buy Isa bonus is December 1 2030.
However, you won’t be able to get the Help to Buy Isa bonus, a maximum of £3,000, if you save the full £12,000 and also use the Lifetime Isa. Overall, the Lifetime Isa is a better account for buying a home.
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