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What is a Cash LISA?
A Cash LISA (or Lifetime ISA) is an ISA account which helps you save for your first home or retirement by offering a government bonus of 25% on the money you save. It's similar to the Help to Buy ISA, which closed to new applicants in November 2019.
You can put up to £4,000 every tax year into your Lifetime ISA, meaning that there is potential to earn a maximum bonus of up to £1,000, completely free, every year 💰
Your LISA account can either be a Cash LISA, where your money is held in a cash savings account, earning small amounts of interest, or a Stocks and Shares Lifetime ISA, where your money is placed in an investment fund, but your capital is at risk.
The Cash LISA bonus is paid monthly, so you can watch your savings grow gradually, however the bonus can only be earned on contributions, not on interest or investment returns.
Your account can be included in your £20,000 annual ISA limit, meaning you can open a Lifetime ISA alongside a Stocks and Shares ISA, a Cash ISA, or an Innovative Finance ISA.
There are a range of Cash LISA providers, so it's a good idea to shop around to find the best account for you. If you already have a Lifetime ISA, you can also transfer your LISA savings to a different account, to get a better deal or interest rate.
How to open a Lifetime ISA
Any UK residents aged 18–40, can open a Lifetime ISA, so if you’re serious about saving you should open one as soon as possible to make the most of the government bonus.
You can pay up to £4,000 into your account every tax year, with lump sums or on a monthly basis, and receive the Lifetime ISA bonus of up to £1,000 a year, until the age of 50.
At this point, your account will stay open and you’ll still earn interest, but you won’t be able to pay in any more money.
If you’re looking to buy a house with your partner, the LISA bonus scheme could be a great option 👩❤️👨 You can each open your own LISA account, contribute savings, and earn the 25% bonus. When it comes to buying a house, you can use both your Lifetime ISA accounts and the bonuses to help with the purchase. Bear in mind that you must both be first time buyers to qualify. However, if your partner already owns property, you can still use your own Lifetime ISA and the bonus towards the house if it is your first home.
Should I get a Cash LISA?
While free money 💸 from the government sounds like a great deal on paper, Lifetime ISAs do come with restrictions, and might not be the right choice for everyone. Whether a Cash LISA account will suit you depends on your individual circumstances.
When is the Lifetime ISA bonus paid?
The Lifetime ISA bonus is paid monthly, and can only be received on contributions, not on interest or investment growth. The Cash LISA limit is £4,000 each tax year, meaning you can receive a maximum government bonus of up to £1,000 every year.
It’s worth noting that you may only withdraw money from your Cash LISA savings if you're using it for the house purchase for your first home, if you’re over 60, or if you develop a terminal illness with less than 12 months to live.
If you withdraw for any other reason, you’ll have to pay a 25% withdrawal charge 💷 so it’s not a good idea to put your money in a Lifetime ISA unless you know you can afford not to touch it.
Using a Cash Lifetime ISA to help to buy a home
If you’re a first time buyer, you can use a Lifetime ISA to save for your home 🏡 You will not qualify if you have ever owned property inside or outside the UK, including any property (or a share of one) you may have inherited.
If this is also your partner's first property, they can open a Cash LISA too, and you can combine the savings and government bonus from both accounts 🤝
However, you can only use a Lifetime ISA to buy a home worth £450,000 or less. If you’re looking to buy somewhere more expensive, like London, this might not be the right choice for you.
In addition, your Cash Lifetime ISA account has to be open for at least 12 months before you can withdraw and claim the bonus. So if you are planning to buy a house in the next year, you might need to find an alternative savings solution.
Using a Lifetime ISA for retirement
A Lifetime ISA can act as an additional savings pot for your retirement savings although bear in mind, it’s not a replacement for your pension!
You can use a LISA to save for retirement by putting in money up until you’re 50, and then withdraw your money after you hit 60.
Your money will receive the government top-up of 25% which will then earn interest alongside the rest of your savings.
Withdrawals from a Lifetime ISA are tax-free, although of course if you want to take money out of your account before the age of 60 you'll have to pay the 25% withdrawal penalty.
Again this sounds great, however you may still get a better deal by simply upping your pension contributions.
The money saved into your pension is tax free, which effectively means you can get a 25% bonus on what you put away, the same as a LISA (and for higher rate taxpayers, this bonus will be even higher).
You can put around £40,000 into your pension each year, and if you have a workplace pension you'll also benefit from employer contributions.
Help to Buy vs Lifetime ISA
Lifetime and Help to Buy ISAs are both government initiatives which can help you save for your first home. Both ISA schemes allow you to put money away for a property and offer a 25% government bonus on your savings.
However, the Help to Buy ISA scheme was closed to new applicants in 2019, so unless you already have an account and are looking for the best option, there is no need to compare.
|Help to Buy ISA||Lifetime ISA|
|Who is eligible?||Anyone 16+ and a first time buyer.||
Anyone between 18–39.
Must be a first time buyer to use it on property.
|What can I use it for?||Just the mortgage deposit.||Exchange deposit or mortgage deposit.|
|Maximum contribution||Up to £200 a month. £1,200 in your first month.||£4000 a year.|
|Bonus||25% up to a maximum of £3,000.||25% up to a maximum of £33,000.|
|How can I pay?||Monthly, (up to £200).||Monthly or lump sums.|
|When can I get the bonus?||After the house sale is completed.||
The bonus is paid into your LISA account monthly.
When you’re ready to buy, the funds plus bonus will be
transferred to the conveyancer handling your purchase.
|When can I use the money?||Once £1,600+ is saved. Minimum of 3 months.||After the account is open for 12 months.|
|Property limits||£250,000 (£450,000 in London).||£450,000|
|Type of ISA||Cash ISA only.||Cash ISA or Stocks and Shares ISA.|
|Do I have to buy a house?||No, you can access the money free of charge.
But you won’t get the bonus.
No, you can use the account to save for retirement.
To withdraw money before 60 there is a 25% charge.
A Help to Buy ISA offers more flexibility, if you choose not to buy a home you can withdraw the money you have saved free of charge, but remember you won’t be able to claim the 25% bonus. Another advantage is you can withdraw your savings a lot faster if you are planning on buying property in a year or less.
However, a Lifetime ISA allows you to save more, access a bigger bonus and enables you to buy a higher value property. If you are sure you want to buy a house, and can afford not to touch the money you save, a LISA account might be a better option.
Can I have a Help to Buy and a Lifetime ISA?
You can open and pay into a Help to Buy ISA and a Lifetime ISA in the same tax year if you want to. They do not have to be with the same provider, but you can only use the bonus from one towards buying a home.
If you use your Lifetime ISA to purchase your first home, you can withdraw your Help to Buy ISA savings free of charge, but you will not receive the bonus.
If you decide to use a Help to Buy ISA towards your first home, you can keep your LISA account and continue to save money for retirement. However, you won’t be able to access the money, or the bonus, until you reach 60. If you need the funds before this, there is a 25% withdrawal charge.
Can I transfer Help to Buy ISA to Cash Lifetime ISA?
If you decide a Lifetime ISA is the best option for you, you can transfer some or all of your Help to Buy ISA savings into a Cash LISA account.
It is important to know that any money you transfer will count towards your yearly LISA contribution allowance of £4,000.
So, if you were to transfer £2,000 into your Lifetime ISA account, you could then only save a maximum amount of £2,000 into your LISA for that tax year, April–March.
Make sure the ISA providers you are using support transfers.
What’s a short-term alternative to a Lifetime ISA?
Placing your money in a Lifetime ISA can feel like a big commitment if you aren’t sure you will eventually purchase property. If you open a Lifetime ISA and decide not to buy a house, you may have to wait until you hit 60 years old to access your savings and any bonus payments, or pay a 25% withdrawal charge.
If you’d like to do more with your money without the commitment of a Lifetime ISA, you could open an Easy Access Pocket with Plum. Provided by Investec, these pockets pay 0.25% AER interest and are available to all Plum users, meaning you can fight inflation and earn a return on your savings.
Although Interest Pockets are available to all Plumsters, we’ve reserved the best rate for our Plum Plus, Plum Pro and Plum Ultra subscribers. With a Plum subscription you can open additional pockets which pay 0.40% Annual Equivalent Rate (AER).
Access to your money is quick and easy as withdrawals can be made within one working day.
What’s a more flexible alternative to a Lifetime ISA?
With a Lifetime ISA you have the opportunity to choose from two different account types, a Cash LISA or a Stocks and Shares LISA.
A Stock and Shares Life time ISA allows you to place your money in an investment fund, but it does also mean your capital is at risk. Opening a Stocks and Shares LISA could potentially offer you better rates of return compared to a Cash Life time ISA, if your investments perform well.
However, if you choose to open a Stocks and Shares LISA, the same Life time ISA restrictions apply, as well the added risk that comes with investing. You can only invest up to £4,000 each tax year in your LISA account and the money must either be used for your first home, or retirement.
Alternatively, a Stocks and Shares ISA, like one offered at Plum, could provide a longer-term, and more flexible solution.
A Stocks and Shares ISA is an account which allows you to invest up to £20,000 each year in a variety of funds, bonds and individual companies without having to pay tax on any potential returns.
Unlike a Lifetime ISA, where your savings must be used for property or retirement, the money in a Stocks and Shares ISA can be withdrawn at any time.
An Investment ISA is a way to potentially make your money work harder, however, it is important to understand that your money is at risk because the value of your investments can go down as well as up.
If you’re interested in investing, it’s good to do your research and make sure you’re ready. Check out our beginner’s guide to investing for everything you need to know to get started. For more information on Investment ISA accounts, read some of our earlier articles for a simple guide to how they work and the ways to find the best Stocks and Shares ISA provider for you.
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