Is a Lifetime ISA right for me?

Authored on
12 Oct 2022



You’d be forgiven for thinking that anyone offering to top up your first-home deposit by 25% must be a scammer. But that’s exactly what the Government offers for wannabe first-time buyers – with a Lifetime ISA.

A Lifetime ISA has two uses: either saving for your first home or for your retirement. But in this article, we’ll just look at the first-time buyer part.

Here is the basic appeal of a Lifetime ISA. You can pay in up to £4,000 a year, with the Government adding a bonus of 25% – which means a potential £1,000 boost to your deposit, each tax year. As a return that’s unbeatable. It could help you shave months (or years) off the time it takes to save for a deposit. But there are a few things you need to be aware of before you leap in and open an account. Let’s run through them.

How old are you?

Bit of a rude question, but you must be aged between 18 and 40 to open a Lifetime ISA. If you’re younger, you could stash your cash somewhere else and transfer it into a Lifetime ISA once you turn 18 and can open the account. But if you’ve reached your 40th birthday, unfortunately you’ve missed the boat and you can’t open a Lifetime ISA.

But it's not all bad news! If you're over 40 and have an existing LISA with another provider, you can still transfer it to us and continue to pay in until you reach 50.

Read about LISAs for over 40s

Are you definitely a first-time buyer?

This might sound like an odd question. But a few people have been caught out because they’ve inherited a home or been gifted part of a property in the past. Even though you haven’t physically bought it (and even if you don’t even own it anymore), you’re still classed as a property owner. So you won’t be a first-time buyer, and can’t put a Lifetime ISA towards a home.

Also in the nitty gritty of Lifetime ISA rules is the fact that you need to use a mortgage for some of the property value (not usually a problem for most first-time buyers). You also have to intend to live in the home, not rent it out as a buy-to-let.

When do you want to buy?

A strange quirk of a Lifetime ISA is that your account needs to have been opened at least 12 months before you can use it to buy a property. If you know you’re going to buy within the next year, it’s not the account for you. Also, a Lifetime ISA is only classed as officially ‘open’ when you’ve put some money in it. So, if you’re buying in just over a year, make sure you make your first deposit pronto.

How expensive is the house you want to buy?

You’ve probably got a budget in mind of how much you’re going to spend on your first flat or house. If you’re using a Lifetime ISA, you’ll need to buy a property worth £450,000 or less. For some, that will be way more than they intend to spend. But if you’re buying in a pricier area or with a partner, you might find you breach that limit. Also worth noting is that if you buy with someone else, sadly that property limit isn’t doubled – it’s stuck at £450,000 even if you buy with 10 friends.

If you’re planning to buy soon, it’s easier to predict how much you might spend. But if you’re buying five or 10 years in the future, it’s a bit harder to tell – as house prices may keep rising. Frustratingly, the Government hasn’t increased the limit since Lifetime ISAs were launched, so you can’t bank on it rising with prices.

Do you think you might need the money for something else?

If your main goal is to save for a house, but you think you might need to dip into that pot of money occasionally – for emergencies, or because you don’t have savings elsewhere – the Lifetime ISA probably isn’t for you.

That’s because if you withdraw money from a Lifetime ISA before your 60th birthday for any other reason than to buy your first home, you’ll pay a withdrawal charge of 25%. This sounds like you’ll only lose the Government bonus money, but actually you’ll lose some of the initial amount you saved too.

For example, if you invest £4,000, the 25% Government bonus tops it up to £5,000 in total. If you’re under 60 and withdraw all that money (and aren’t putting it towards your first-home deposit), you’ll be charged 25% of the total. That equates to £1,250, meaning you’ve £3,750 left, or £250 less than you put in.

If you’re in this camp, you could consider splitting your savings in two. You could use a Lifetime ISA for money you know you won’t need to touch, and put the rest in an easy-access savings account – so you can get your hands on it if you need to.

Are you buying with someone else?

Great news – as long as you both meet the criteria, you can both have a Lifetime ISA. That means you’ll both get a top-up of as much as £1,000 towards your deposit savings – double the free money!

You can’t have a joint Lifetime ISA account, so you’ll need to open one Lifetime ISA each. And even if you’re buying with someone who doesn’t qualify for a Lifetime ISA, you can still open a Lifetime ISA and put it towards the deposit.

Do you already have a Help to Buy ISA open?

The Help to Buy ISA was launched before the Lifetime ISA and works in a similar way – giving you a 25% Government top-up on money you’re saving for a first home.

Help to Buy ISAs are now closed to newcomers, but if you already have one you can keep it open and keep paying into it. You can also hold a Lifetime ISA and Help to Buy ISA at the same time, but you can only get the Government bonus on one – sadly no doubling up allowed here.

If you’ve got a Help to Buy ISA, you might want to think about whether transferring it to a Lifetime ISA would be better. In a Lifetime ISA, you can earn a potentially higher Government bonus each year (assuming you save more money), plus the property limit with a Lifetime ISA is higher for homes outside of London.

But annoyingly, any money you move from your Help to Buy ISA into your Lifetime ISA counts towards that £4,000 annual Lifetime ISA limit. That means if you’ve built up lots of money in your Help to Buy ISA, it might take a few tax years to move it across – which may mean it’s not worth doing.

Check out...

AJ Bell's Lifetime ISA Dodl's Lifetime ISA

Remember that the value of investments can change, and you could lose money as well as make it. How you're taxed will depend on your circumstances, and tax rules can change. Tax and LISA rules apply.

A Lifetime ISA isn't for everyone. If you withdraw money before age 60, unless it's to buy your first home, you'll pay a government withdrawal charge of 25%. And if you choose to save in a Lifetime ISA instead of enrolling in, or contributing to, your workplace pension scheme, you'll miss out on your employer’s contributions. Your current and future entitlement to means-tested benefits may also be affected.

These articles are for information purposes only and are not a personal recommendation or advice.