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Lifetime ISAs: pros and cons

Lifetime ISAs (LISAs) can help you build a deposit for your first home faster. But it’s important to understand the advantages and disadvantages before deciding if it’s the right product for you.

What is a lifetime ISA?

A lifetime ISA is a type of individual savings account (ISA) that’s designed to help you save for your first home, or to save extra for retirement.

You can pay up to £4,000 into a LISA each tax year (a period of 12 months running from April to April), and the government will top up everything you pay in by 25%. This means you can get up to £1,000 extra money each year!

You must be aged between 18 and 39 (inclusive) to open a lifetime ISA. You can pay money in - and receive the bonus - until you turn 50.

Is a lifetime ISA worth it?

If you’re saving to buy your first home, the generous lifetime ISA bonus could get those house keys in your hands quicker.

However, there are rules and eligibility factors to be aware of, which means it’s not suitable for everyone. We’ve put together some lifetime ISA pros and cons to keep in mind before taking one out.

Advantages	Considerations
You can get up to £1,000 bonus from the government each year	LISAs can only be used towards buying your first home in the UK, or for life after 60
You won’t pay any tax on the money you withdraw	The home you buy with your LISA must cost £450,000 or less
If you’re buying a first home with a partner, they can use their LISA too	There’s a government withdrawal charge if you don’t use your LISA as the government intended
LISAs can be used for life after 60, as well as to buy your first home	The value of your LISA could change due to inflation (cash LISA) or changes in the stock market (stocks and shares LISA)

The advantages of lifetime ISAs

Get up to £1,000 bonus from the government each year

This is possibly the best lifetime ISA feature. The government tops up LISAs by 25% - so every time you pay in, the government does too!

If you put away the maximum amount of £4,000 each tax year, you’ll get £1,000 from the government on top. This can help you build your deposit faster, taking you one step closer to your home ownership dreams.

Lifetime ISAs are tax-exempt

As with other ISA products, you won’t pay any income tax or capital gains tax on the money you take out. This applies to any interest earned in a cash LISA, or any investment growth from a stocks and shares LISA.

This means HMRC doesn’t chip away at your deposit.

Your partner can use their LISA too

If you’re buying your first home with your partner, did you know they can use their own lifetime ISA towards the deposit too?

If you both meet the eligibility criteria, combining your LISAs could be a great way to boost your deposit fund.

Lifetime ISAs can also be used for life after 60

Although most people use a LISA to save for their first home, it can also be used to save for later life. You can continue paying in until the age of 50, and you can withdraw the money from your 60th birthday.

Please be aware that a LISA might not be the best option for retirement savings if you’re employed and your employer contributes to your pension. You can find out more in our lifetime ISA vs pensions article.

Things to be aware of about lifetime ISAs

There are rules for how you can use your LISA

Lifetime ISAs can only be used towards buying your first home in the UK, or for life after 60. Understanding how the product works can help you decide if it’s right for you.

The property you buy must meet certain criteria

The home you buy with your lifetime ISA must cost no more than £450,000. You should also intend to live in the home, and you must buy it with a mortgage and use a solicitor.

If you live in a part of the country where average property prices are high, this might stop you from using your LISA to buy the property you want in your local area.

There's a government withdrawal charge if you don’t use your lifetime ISA as the government intended

You’ll have to pay a 25% withdrawal charge if you don’t use the money towards your first home, or keep it in the account until you turn 60. The charge also applies if you withdraw your money within the first 12 months of opening your lifetime ISA.

Because you’ll be charged 25% of the money you saved yourself, plus the money the government put in, this withdrawal fee will be higher than the bonus you received. See an example of how this works below.

The value of your lifetime ISA can change

There are two types of LISA – cash LISAs and stocks and shares LISAs.

Inflation can affect the value of money in a cash LISA, meaning the same amount of money could be worth less in the future than it is today. If the interest rate is lower than the rate of inflation, this could mean you can buy less with your money in the future (although of course, you’ll also have the 25% top up!).

Money invested in a stocks and shares lifetime ISA is affected by changes in the stock market, meaning the value of your investments can go down as well as up. If you decide to buy your home at a time when the value of your LISA is lower, you could end up with less money than you paid in (again, though, you will also have the 25% top up).

OneFamily only offers stocks and shares lifetime ISAs as we believe these have the best potential to outgrow inflation. If you’d like to find out more, you can read our article on cash vs stocks and shares lifetime ISAs.

The example below shows how the government withdrawal charge leaves you with less money than you put in:

You put in £1,000. The government adds £250 (the 25% bonus), making the total amount £1,250.

If you withdraw the lot (£1,250), you’ll be charged 25% (the withdrawal charge) of this amount. As 25% of £1,250 is £312.50, you’ll lose this amount from the £1,250 you took out.

This leaves you with £937.50, which is less than the £1,000 you originally put in.

Choosing what’s right for you

If you’re saving for your first home, and you meet the eligibility criteria, a lifetime ISA can be a great way to save up your deposit faster thanks to the government bonus.

What if you have different savings goals, or you don’t meet the required criteria for a LISA? Our Stocks and Shares ISA, may be a better option for you.