- A Lifetime ISA (LISA) is a savings account for individuals aged 18-39 to save for buying a house or retirement. Deposits are matched by the government with a 25% bonus, up to £1,000 annually. Withdrawing for reasons other than home purchase or retirement incurs a 25% penalty.
- LISAs are recommended for future first-time buyers, but property value must be below £450,000 and the LISA should be open for at least a year before using the funds.
- When comparing LISA to Shared Ownership and Rent to Buy schemes, LISA allows 100% ownership and a government bonus, making it best in my opinion.
So, you’ve decided that it’s about time to start getting serious about purchasing your first house and came across the popular lifetime ISA, but with a variety of different help to buy schemes available, you may be left wondering whether a lifetime ISA is worth it?
I don’t blame you for asking, there are numerous other schemes which are just as popular, with each offering a different set of advantages and disadvantages; so in this guide, we’re going to dive into the Lifetime ISA to explore what it is, how it works, whether getting one is actually worth it and comparing it to the other options.
What is a lifetime ISA?
A lifetime ISA, also known as a LISA, is a savings account meant for individuals who wish to set aside some money to eventually purchase a house (worth up to £450,000) or to save for their retirement. You are able to save a maximum of £4,000 every year and the government will give you a 25% bonus for what you save (up to a maximum of £1,000). Depending on the provider, this bonus will either be split and paid out monthly over the entire year or it will be paid out in a lump sum.
There are two types of lifetime ISAs – cash and investment. As the name suggests, in a cash LISA, your deposits are held as cash and you earn interest as well as the government bonus. On the other hand, in an investment LISA, your deposits are used to buy stocks, shares and indexes (you choose which you want to buy of course).
Other important factors to note are that In order to open a LISA, individuals have to be between 18 and 39 year olds, and if you ever want to withdraw the funds in your LISA or any other reason than to purchase a house or at retirement age, you will be hit with a 25% penalty – because this penalty applies to the overall funds in the account, you works out to a 6% loss on your savings on top of losing the bonus given to you by the government. Therefore, you should be 100% sure that you are able to set this money aside and never touch it until you are ready to purchase a house.
Is a Lifetime ISA Worth It?
Lifetime ISAs are definitely worth it but only if you are 100% sure that they meet your specific criteria and align with your house buying goals. As we mentioned above, you can only use a LISA to purchase properties that are worth less than £450,000 which may not be ideal for first time buyers in London as your options would be rather limited. It’s also worth noting that you must have had your LISA open for at least 1 year before you can use the funds as a deposit.
At Amateur Landlord, we’ve been big fans of lifetime ISAs ever since they came out and we’d feel comfortable recommending them for future first time buyers. Having said that, we’ve put together the below table that compares the lifetime ISA with other help to buy schemes to help you decide whether a lifetime ISA is worthwhile for you. We’ll look at the Cash LISA, ignoring the investment LISA, as that is by far the more popular option amongst the two available and there are more providers offering them.
Lifetime ISA vs Other Schemes
The three best schemes that are currently available for first time buyers are Shared Ownership, Rent to Buy and, of course, the Lifetime ISA (note that we have not included the help to buy ISA on this list as it is now closed for new applicants). Let’s break all three of these down in an easy to understand table:
|Lifetime ISA (cash)
|Rent to Buy
|A savings account intended for 18-39 year olds setting money aside to purchase their first home.
|You could opt to buy a share of a house and pay rent on the rest of it. Often, the smallest share you can purchase is 25%.
|You can rent a house at intermediate rent (80% of market rate) for a minimum of five years, offering you the chance to save more money for a deposit on the property.
|Typically, you will only need a 5% deposit for your share of the property. So, if for example, your property is worth £400k and you are buying a 25% share, a 5% deposit would be £5,000.
|Again, this depends on your mortgage lender but 5% is usually the minimum deposit required.
|This depends on the mortgage provider.
|Again, this depends on the mortgage lender.
|Stand out Benefit
|The government will give you a 25% bonus on the money saved each year, up to £1,000.
|Shared ownership enables people to get on the property ladder faster and the deposit is far smaller than if you were buying the entire property.
|You can rent the property at a slightly reduced rate which will help you to save more money for the deposit.
|There is a 25% penalty if you change your mind and wish to withdraw your savings. The property you purchase can not be worth more than £450,000.
|You have to pay rent on the portion of the property that you do not own. Combining the rent and mortgage payments, you will still pay less than if you were renting but not that much less. You will also require permission from the majority holder to make any significant changes to the property and you will only be entitled to the capital gains on your share of the property.
|For the first five years, you will have to pay rent. Rent to Buy is also only available for new builds so you cannot undertake a buy refurbish refinance project or anything like that.
As you can see, there are numerous factors to consider when deciding which property buying scheme you’re going to opt for. The general advice would be that if you want to retain 100% ownership of the property, you may want to opt for the LISA and try to maximise the bonus you can receive from the government. However, if you’re looking to purchase a new build or you want to reduce your rent whilst you save up your deposit you may want to look into Rent to Buy.
We’re not big fans of shared ownership so we wouldn’t recommend it – there are many complexities involved when buying with another party owning part or the majority of the property, and the idea of having to pay someone rent as well as paying a mortgage doesn’t sit well with us, it’s not exactly what people have in mind when they thinking about buying a property.
At this point, if you’re of the opinion that the Lifetime ISA is the best house buying scheme for you to take advantage of, let’s ensure that you’re 100% sure by looking into the pros and cons of Lifetime ISAs before we provide you with some recommended providers.
Lifetime ISA Pros & Cons
1. £1000 Bonus
There’s up to £1000 up for grabs every tax year if you deposit £4,000 into your lifetime ISA – that is obviously a massive benefit of having one, and is very likely why it’s such a popular house buying scheme. If buying your first house is a longer term plan, you can begin saving at 18 all the way through to an age of 39, meaning that in total there is £21,000 up for grabs. I doubt anybody will actually save that long so for most people, there’s somewhere in the ballpark of £2,000 to £5,000 in free cash up for grabs. Potentially double that if you are buying with a partner who also makes use of a lifetime ISA.
2. Tax-free capital gains and/or interest
If you choose to go for an investment LISA, you’ll be happy to hear that just like with any other ISA, your potential capital gains are tax-free. If you instead opt for a Cash LISA, you’re set to benefit from no tax on the interest earned. Another bit of good news is that the interest you earn doesn’t impact your personal savings allowance so you’ll still be able to earn £1,000 in tax free interest if you’re a basic tax rate payer.
Note that any money you place into your LISA will count towards the £20,000 you can place into ISA accounts each tax year.
3. Protected up to £85,000
Your deposits into a cash LISA are protected by the UK’s Financial Services Compensation Scheme (FSCS) up to £85,000. This protects you from the risk of losing your money if the product provider goes bust.
Unfortunately, this does not apply to investment LISAs as your funds are invested into a vehicle of your choosing so if the investment doesn’t work out, that is all part and parcel of investing – which is why you must understand the risks of investing and perform due diligence when choosing what product to invest into.
4. Couples can have one each
As alluded to before, every first time buyer can have a lifetime ISA, even if two people are buying the same property as a couple. So if you are planning to purchase a house with your other half, be sure to take advantage of this and get them to open one too. Important to note however, is that the £450,000 house value limit is still the same, it doesn’t double because there are two buyers.
1. Penalty if you choose to withdraw funds
When you deposit funds into a lifetime ISA, there are only two ways in which you can withdraw that money without incurring a penalty – either by sending it to your solicitor when buying a house or at the age of 60 if you choose to use the LISA as a retirement savings pot.
If you withdraw for any other reason, you will be hit with a 25% penalty. You may shrug your shoulders here because the government bonus is 25% as well, so you’d just lose the bonus right? I initially thought that as well but it doesn’t work like that, the bonus is 25% of that year’s contributions whereas the penalty is applied to the entire pot, so in effect you’d lose the bonus and 6% of your savings. For example, if you have maxed out your LISA and saved £4,000, you would receive a bonus of £1,000 bringing your pot to £5,000. If you wanted to withdraw the cash but not for a house purchase, you would be left with £3,760 after paying the penalty – a 6% loss.
This is exactly why it’s so important to be 100% sure that you can set this money aside for a house purchase and forget about it until you’re ready to pull the trigger.
2. Property must cost less than £450,000
Sorry London buyers, the borough of Kensington and Chelsea is out of the picture. The property you purchase through a lifetime ISA must be worth £450,000 or less. This unfortunately does not increase along with the property market or with inflation so in real terms, this amount will decrease the longer you wait (assuming that property prices rise).
If you’re looking to buy a property around that price quite soon, you should be okay, but I wouldn’t consider a lifetime ISA if you are planning to buy a £400,000 property in 5 years time. The likelihood is that a property worth £400,000 now will be worth closer to around £500,000 by that time, perhaps even a lot more.
Lifetime ISA Options
After having looked at the pros and cons of lifetime ISAs, if you still think that Lifetime ISAs are worth it, you may be wondering which provider you should opt for. Let’s look at the best options currently available:
|Interest rate on cash savings
|LISA bonus paid
|Lump sum – 4-9 weeks after each deposit
|Lump sum – 4-9 weeks after each deposit
|Lump sum – 4-9 weeks after each deposit
|Lump sum – 4-9 weeks after each deposit
|0.45% to 0.75%
|0.25% per year plus £11.95 per trade
We’re big fans of the lifetime ISA and would 100% recommend it over the other help-to-buy schemes that are currently live – the 25% annual bonus is amazing and, unlike the other schemes, you maintain full ownership over the property meaning that you’re set to benefit from all possible capital appreciation and you don’t have to ask other shareholders for permission when selling it or when refurbishing it.
If you’re planning on purchasing a house in the near future, it might be a good idea to get acquainted with the house buying process – we have a step-by-step guide on how to buy a house that we’d highly recommend. It’s aimed at investors but the house buying process is still the same for first time buyers looking for a residential property to live in.