By Nic Hopkirk

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A Lifetime ISA is an ISA with benefits. You can save up to £4,000 a year with one and the government will chip in an extra 25%. That’s up to £1,000, for free. 

Worried about how you're ever going to save up enough to buy a place? A Lifetime ISA could earn you £1,000s of free cash for your first home.

Lifetime ISAs can be used by anyone saving up for their first pad - or for retirement.

You can open one up if you’re between 18-39 and you can keep stashing cash away in it until you’re 50. 

You can save up to £4,000 a year with a Lifetime ISA and the government chips in an extra 25% of what you’ve saved on top. 

That’s up to an extra £1,000 a year, for free.

You earn tax-free interest on whatever you save and what the government contributes, which in turn earns interest the next year. That’s called compound interest.

How can I use a Lifetime ISA to buy my first home?

There are a few rules to follow if you want to use a Lifetime ISA (LISA) to buy your first place:

  • The property you’re buying should cost no more than £450,000
  • It must be bought in the UK 
  • It must be bought with a mortgage
  • You must be living in the UK when you apply for a LISA, but it doesn’t matter if you’re a UK citizen or not. (The only exceptions are if you’re a crown servant, on an overseas posting or the spouse/civil partner of someone who is)
  • You must plan to live in the property you’re buying
  • You must be a first-time buyer to use the scheme and have never owned a property before, anywhere in the world
  • Even if you previously inherited a property, sold it instantly and never lived in it, you’d no longer count as a first-time buyer
  • You must have had a LISA open for a year to get the first-time buyer bonus

So even if you're not sure you'll use it, it's worth opening one with £1 – just to get the clock ticking, advises MoneySavingExpert.

Then if you do want to use it, even if you’ve only had £1 in it for the last 12 months, you can put £4,000 in and collect the £1,000 bonus a month later. 

How do I open a Lifetime ISA? 

There are lots of different LISA providers to choose from. And you can change providers if you discover one that’s offering a better rate of interest than yours.

It’s usually easiest to apply for a LISA online. You’ll need to supply:

  • Your name and date of birth
  • National Insurance number
  • Address and contact information 
  • Proof of identity
  • Proof of address

You can hold multiple LISAs at the same time but you can only open and pay into one LISA in each tax year.

What are the best Lifetime ISA rates right now?

The best Lifetime ISA interest rates can be found on sites like Moneyfacts and Which.

Below is an example of some of the current ones on offer:

Lifetime ISAAERNoticeInterest paid
Moneybox 0.85%NoneMonthly
Paragon 0.5%NoneAnniversary
Newcastle 0.35%NoneAnniversary

Moneyfacts.co.uk

Is a cash Lifetime ISA free to set up?

Yes. Cash Lifetime ISAs are free to set up and run.

However, there are also stocks and shares Lifetime ISAs. And providers usually charge management fees to run them.

The return on investment can be greater with a stocks and shares LISA, but it's worth looking into low-cost funds if you choose this route. Otherwise the fees can run into thousands.

For cash LISAs, bonuses are paid out at the end of each month, and are based on how much you squirrelled away the previous month. 

So, for any cash paid in between the 5th of January and the 4th of February, you'd receive the 25% bonus for it at the end of February.

What is the maximum bonus I can receive with a Lifetime ISA?

The biggest bonus amount you could collect with a LISA, if you open it aged 18 and kept paying into it until you hit 50, is £32,000.

This would be dependent upon you making the maximum contributions of £128,000 during that time.

Can I save into a Lifetime ISA if I have other ISAs?

Yes. The LISA limit is £4,000 a year, but you’re allowed to save up to £20,000 a year in ISAs. So you’d still be able to save another £16,000.

Are there any penalties if I don’t use the Lifetime ISA to buy a property?

Yes. If you take some or all of your money out for something else, you’ll be charged 25% on what you withdraw. And that costs you money. In financial terms it means a loss of 6%.

Say you saved £10,000 and earned a £2,500 bonus, you’d have £12,500 in your LISA.

If you withdrew that £12,500, you’d be charged 25% on the withdrawal. So you’d only get £9,375 back.

However, you can also use the LISA to save towards your pension pot if you don’t want to use it to buy a property. And as long as you take the money out after you’re 60, there won’t be any penalty.

At that point, you can take all the savings out tax-free. Or you can withdraw a regular tax-free income from your fund.  

How do I use my Lifetime ISA money for my deposit?

Once you’re ready to buy your first home, you need to ask the LISA provider to transfer the money directly to your conveyancer or solicitor – don't withdraw the cash yourself.

If you do withdraw it to an account in your name, you'll pay the 25% withdrawal charge. 

Once transferred to your solicitor, all of your savings, including the bonus, will then be ready to use for when you exchange contracts on the sale.

But there’s a caveat: the property purchase must be completed within 90 days of your solicitor receiving the funds from your LISA.

If it’s going to take longer, either delay taking the money out or ask your solicitor to write to HMRC to get an extension on the 90 day limit.

If the sale falls through, you won’t lose the funds, they’ll just go back into your LISA. 

Can I get a stocks and shares Lifetime ISA? 

Yes, you can invest in a Lifetime stocks and shares ISA. But be aware that as with all investments, there are risks involved, so you may get back less money than you put in.

  • The Share Centre has a ready-made Lifetime ISA, which can be opened without a minimum deposit.
  • Moneybox operates a Stocks & Shares Lifetime ISA, which can be opened form £1.
  • Forester Life offers a Lifetime ISA with a starting balance of £20. Minimum monthly investments of £20 are needed for this one.

Find out more available options at Moneyfacts.