Lifetime ISAs are tax-free savings account that come with an added bonus.
The government adds 25% to the first £4,000 you save each year. But there are conditions attached.
Firstly, only people aged between 18 and 40 can open one. Although you can keep paying in longer once you have one.
Secondly, you only get the government bonus cash if you use the money to buy your first home or withdraw it after you turn 60
As long as you meet those conditions, though, you can pocket up to £1,000 a year extra cash simply by saving in the right place.
There are three basic sets of rules applied to lifetime ISAs.
Who can open them
What you can pay in
What you need to do to get your bonus money
Taking them in turn firstly - who can open one.
To open a lifetime ISA you need to be aged between 18 and 40 and UK tax resident.
It doesn't matter if you have other types of ISAs open, but you can only pay into one lifetime ISA a year.
You can only open a lifetime ISA for yourself, however, and not on anyone else's behalf.
Secondly, there are rules about what you can pay in.
This is pretty straightforward - you can save up to £4,000 a year into your lifetime ISA between the ages of 18 and 50 and get 25% added to any money you save.
That means there is up to £32,000 free cash available to people maxing out their government bonuses.
Thirdly, there are rules about withdrawing your money.
You can take money out of your lifetime ISA whenever you want, but you will be hit with a 25% penalty on withdrawals unless you use the cash to help buy your first home or wait until after you turn 60.
This type of lifetime ISA pays out interest in the same way as a cash ISA.
You still get the 25% savings top up, and are restricted to making withdrawals to buy your first home or after you turn 60 if you want to keep it.
These ISAs are best for people who are saving up for something they plan to buy (almost certainly a first home) in the next few years or who want to know exactly what they have to spend.
These work the same way as a standard stocks and shares ISA, where your money is put in the markets rather than a cash savings account.
You get the same bonus and withdrawal restrictions as you do with a cash lifetime ISA, but the risks and potential rewards are higher with this type of account.
Stocks and shares lifetime ISAs are best for people looking to grow their money over the medium or long term, so are more suited to people looking to withdraw their money after they are 60 or if they're not planning to buy a home for several years.
This type of lifetime ISA pays out interest in the same way as a cash ISA.
You still get the 25% savings top up, and are restricted to making withdrawals to buy your first home or after you turn 60 if you want to keep it.
These ISAs are best for people who are saving up for something they plan to buy (almost certainly a first home) in the next few years or who want to know exactly what they have to spend.
These work the same way as a standard stocks and shares ISA, where your money is put in the markets rather than a cash savings account.
You get the same bonus and withdrawal restrictions as you do with a cash lifetime ISA, but the risks and potential rewards are higher with this type of account.
Stocks and shares lifetime ISAs are best for people looking to grow their money over the medium or long term, so are more suited to people looking to withdraw their money after they are 60 or if they're not planning to buy a home for several years.
Our editors pick these deals by weighing several factors such as the minimum initial, lump sump and monthly deposit, as well as the number of funds available to invest in.
Capital at Risk.
“Charges for holding shares & funds are % with the AJ Bell Youinvest lifetime ISA. You can deal from £1.50. That makes it our top pick for cheap investment in a lifetime ISA.”
Capital at risk. Lifetime ISA rules apply.
“With more than 3,000 funds and the ability to buy shares in the UK and overseas, the Hargreaves Lansdown lifetime ISA gives you a massive range of options in how you use your savings. It’s also easy to review and change investments through the app.”
Lifetime ISAs replaced help-to-buy ISAs as the government's favoured way to help people out who are saving up for their first home.
If you've never owned a home, there's not much out there that can beat them once you factor in the 25% bonus on offer.
But there are two serious considerations before you rely on them for your deposit.
It has to be your first home. If you've ever owned or part owned a property or land anywhere in the world - even just a time share or on some types of caravan site - you won't be eligible for the bonus cash.
Secondly - there's a £450,000 limit on what you can buy. That might sound like a lot, but if you're buying with someone else, and not for a few years, you might find yourself butting up against the limit. And discovering, after you find your dream home, that the money you'd been relying on to help pay your deposit is no longer available can come as a nasty surprise.
The £1,000 a year bonus cash can be a big help - but check the small print before you rely on it."
Lifetime ISAs let you earn interest or grow money you invest with them tax free, as well as offering a 25% bonus on top of what you put away, if you wait until you're 60 to withdraw the cash.
That makes them one of the best ways to save for your retirement out there, but not a direct replacement for a private or workplace pension.
That's because workplace pensions see your boss top up your savings and can let you pay in from your pre-tax salary - saving you both income tax and national insurance - and are also largely tax-free when it comes to their growth.
Private pensions don't benefit from top ups from your boss, but still offer a 20% bonus to make up for income tax (even if you don't pay it) with people who pay a higher rate of income tax able to claim extra money back too.
But, if you're already paying into a workplace pension, a lifetime ISA has a key advantage over a private pension - you don't pay any tax when you withdraw your cash.
To make up for the tax relief when you pay into them, pensions are taxed like income when you draw money out of them. A lifetime ISA isn't, meaning you can pull as little or as much as you like out of them without losing anything to HMRC.
Lifetime ISAs can provide a welcome boost later in life, but don't replace pensions entirely."
If you're planning to use your lifetime ISA to help pay for a first home, it makes sense to choose a cash lifetime ISA.
That's because it will let you know exactly how much money you have saved up, and that amount won't change suddenly if markets fall - something that could leave a hole in your savings just as you need to access them to pay your deposit. And if you're choosing one of those, the best LISA provider will be whoever is paying the most interest.
If you're planning on using the money after you turn 60, a stocks and shares lifetime ISA makes more sense - as you have plenty of time for your investments to grow.
Over 20 years (the smallest amount of time between opening your lifetime ISA and being able to access it penalty-free without buying a house), the returns on the markets nearly always beat those on cash savings account.
In this situation, finding the best provider will depend on whether you want to choose your own investments or let a professional manage your funds for you.
Having your money managed for you will generally cost you more in fees.
We've rounded up our best deals for stocks and shares lifetime ISAs below:
The best lifetime provider for you depends on how you plan to use your cash."
If you decide to take money out of your lifetime ISA before you're 60 for any reason apart from buying your first home - the government will take 25% of money you withdraw.
But while that sounds like it's just them reclaiming the bonus - it will actually cost you more than the government added in the first place.
The easy way to explain this is with an example.
If you pay in £800 - the government adds a quarter to it. Meaning you get an extra £200 and your lifetime ISA has £1,000 in total.
If you then withdraw that £1,000, the government takes a quarter from that new - bigger - amount. So £250 is taken back.
You're left with £750 - £50 less than you paid in in the first place.
That means that while you can access your money early, unlike with a pension, doing so will mean you lose out on some of your savings.
One, and you can only pay up to £4,000 into it each tax year. This leaves you with the rest of your ISA allowance to use in another ISA.
It should be added to your Lifetime ISA at the end of the tax year, 4th April. However, check with your provider before opening your account to be sure.
Yes. While you can only pay into one lifetime in each tax year, you can still pay into any other sort of ISA you have as well. So that's one cash ISA, one stocks and shares ISA and one innovative finance ISA.
However, you cannot pay in more than £20,000 in total across the four ISAs in any one tax year.
Yes. Provided your new provider accepts transfers in, there's nothing stopping you moving your money from one lifetime ISA provider to another.
Yes. Money you transfer to a new lifetime ISA provider includes any government bonus cash you've already built up.
If you die your lifetime ISA ends on the date of your death. There’s no charge to withdraw the funds or assets from your account.
Yes. In the Autumn Statement 2023, Jeremy Hunt revealed that the rules around ISAs would change in April 2024.
For example, the government plans to scrap the rule of only having one of each type of ISA and it will allow people to have multiple subscriptions to the same type of ISA. Plus, the government will allow partial transfers of ISA funds between providers during the year.
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