A Lifetime ISA (or LISA) is an ISA account which helps you save for your first home or retirement.

To sweeten the deal, the UK Government offers 25% tax relief on the money you save thanks to an income tax reimbursement from HMRC.

You can put up to £4,000 every tax year into your Lifetime ISA, meaning there's potential to earn a maximum bonus of £1,000 each year, completely free.

Your LISA account can either be a Cash Lifetime ISA (where your money is held in a cash savings account, earning interest), or a Stocks and Shares Lifetime ISA (where your money is invested). Note that your capital is at risk if you invest because the value of investment can fluctuate according to market forces.

Your account can be included in your annual ISA limit. For the 2023 to 2024 tax year the ISA limit is £20,000, 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 Lifetime ISA providers, so 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.

Should I get a Lifetime ISA?

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 LISA account will suit you depends on your individual circumstances.

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 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.

If you're a first-time buyer, you can use money from your Lifetime ISA to help fund the purchase of your first property. 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.

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 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 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 Lifetime ISA 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 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 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! But 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.

What are the alternatives 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 a 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 FSCS-protected savings Pocket with Plum (Easy Access Interest Pockets are provided by Investec Bank Plc.).

Or, Plum Interest is a high-quality fund (containing investments backed by the UK Government) that aims to follow the Bank of England base rate.*

With either of these options, access to your money is quick as withdrawals can be made within one working day.

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.

*Returns are not guaranteed. Capital at risk if you invest.

If you'd like to learn more about Plum then you can check out our website.