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Is a lifetime ISA right for you?

Written by Ines Pena, Digital Content Executive

With a lifetime ISA, you can get up to £1,000 of free money each tax year from the government! But it’s important to understand the rules and restrictions of lifetime ISAs, to decide if it’s the right product for you.

What you need to know:

There are two main financial goals you can use your lifetime ISA towards:

Saving for a first home, or
Saving for retirement.

You have to be between the ages of 18 and 39 (inclusive) to open one.

If you withdraw money from your lifetime ISA for any reason other than buying your first home before the age of 60, you'll pay a 25% government penalty fee on everything you take out.

Lifetime ISAs are a type of ISA where the government tops up everything you save or invest every month by 25%. You can put in up to £4,000 into a lifetime ISA each tax year, so that’s a free £1,000 up for grabs whenever you max out your allowance.

It may sound like a dream come true, but it comes with a compromise: unlike a regular ISA, you can’t use the money in a lifetime ISA for anything you like! You’ll have to commit your money to a couple of specific goals, otherwise you’ll be charged a penalty fee to withdraw your money.

So who is a lifetime ISA for? First, we’ll take a look at who can open a lifetime ISA and what future money goals these accounts are made for. This can help you decide whether or not a lifetime ISA is right for you.

Who can open a lifetime ISA?

Not everyone can open a lifetime ISA, so if you’re interested in the 25% government bonus, you’ll first need to check if you’re eligible.

You can open a lifetime ISA if:

you’re between the ages of 18 and 39 (inclusive), and
you’re a UK resident or a Crown servant living abroad.

Even if you can open a lifetime ISA, you should make sure this type of account is right for your future goals.

What is a lifetime ISA for?

There are two main financial goals you can use your lifetime ISA towards:

Saving for a first home, or
Saving for retirement (or for life after 60).

You can also use your lifetime ISA towards both these goals. We’ll explain how this works later in this article.

If you take the money out of your lifetime ISA for any reason other than buying a first home and you haven't yet turned 60, you’ll have to pay a 25% government penalty fee on everything you withdraw.

This penalty fee will include both your own money and the lifetime ISA bonus, so you’ll not only lose the bonus but some of the money you put in as well.

Using a lifetime ISA to buy your first home

The 25% government bonus on a lifetime ISA is designed to help you get your first home faster.

If you max out your £4,000 annual lifetime ISA allowance, you can get up to £1,000 each tax year on top of your own savings or investments to help you build up a deposit for your first home.

You can also use two lifetime ISAs towards the same property, if you’re buying it with someone else and you’re both first-time buyers. In fact, if you’re both maxing out your lifetime ISA allowances, you could get a combined extra £2,000 towards your first home each tax year.

The lifetime ISA also works with other government schemes designed for first-time buyers, such as the First Homes scheme.

Once you’ve used the money in your lifetime ISA to buy your first home, you can then leave your account open and keep using it to save for retirement!

Rules to be aware of

You have to be a first-time buyer.
The house you’re buying can’t be worth more than £450,000.
You have to live in the house that you buy (you can’t buy it to rent it out, for example).
You have to wait 12 months from your first payment into your lifetime ISA before you can use it to buy a house.

Using a lifetime ISA to build an extra pot of money for retirement

Whether you’ve already used it to buy your first-home or not, you can keep your lifetime ISA open and keep using it to put money away for life after 60.

You can pay into your lifetime ISA until age 50 and you’ll still get the 25% government bonus on top of everything you save or invest during this time.

Then, when you turn 60, you can withdraw the money from your lifetime ISA to use however you want without having to pay a penalty fee.

If you are wondering whether to put money away for retirement in a lifetime ISA or a pension, it’s important to keep in mind that, in most cases, a pension will be the best way to increase your retirement savings. However, you can have both and they can work together side by side as separate pots of money.

Rules to be aware of

You have to open the lifetime ISA before age 40.
You can only pay in until age 50.
You have to wait until age 60 to withdraw your money, otherwise you’ll pay a penalty fee.

Is a lifetime ISA right for me?

Whether or not a lifetime ISA is right for you will depend on your financial goals and how committed you are to them.

If you’re dedicated to the dream of owning your own home someday, whether by yourself or with someone else, then a lifetime ISA could be a great option for you as you’ll get some extra money on top of everything you put away for your mortgage deposit.

If you’re hoping to build a secondary retirement fund as a companion to your pension, so you can do more of what you love when you retire, then a lifetime ISA can help give you some extra cash to make that happen.

However, if neither of these goals sound like something you’d like to commit to right now, then something like an ISA might be a better option for you. That way, if you decide to fully commit to buying your first home in the future, you can move money you’ve already saved in your ISA into your lifetime ISA!

Our Lifetime ISA

With our stocks and shares Lifetime ISA you can invest up to £4,000 each tax year for a first home or retirement - and get 25% on top of everything you put in, up to an extra £1,000!

Explore our Lifetime ISA

The Onefamily Lifetime ISA invests in stocks and shares. This means your money has good potential to grow, but the value of your investments could go down as well as up and you could get back less money than you've put in.