What is the Best Lifetime ISA in December 2023

One of the best ways to save money for a deposit to buy a house is by opening a Government Lifetime ISA. You can use this savings account to save up to £4000 per year and the Government will top up your annual savings by an extra 25%. Another benefit is that you don’t pay tax on any interest your savings make. A Lifetime ISA can be opened between the ages of 18 and 39. Here is everything you need to know, including the best Lifetime ISAs in December 2023.

Best Lifetime ISAs:

• Moneybox – 5% (inc fixed 0.85% 1 yr bonus).
• Bath Building Society – 3.79%
• Beehive Money 3.5%

(Read on for more info about these products)

What is a Lifetime ISA?

Introduced in 2017, the Lifetime ISA (Individual Savings Account) or LISA is a savings and investment Government scheme designed to assist individuals aged 18 to 39 in saving for their first home or retirement. It provides a government bonus of 25% on contributions, up to a limit of £1,000 per tax year.

Who is a Lifetime ISA for?

Primarily tailored for individuals aged 18 to 39, a Lifetime ISA caters to those aiming to save for their first home purchase or retirement while benefiting from a government bonus of 25% per tax year, up to £1,000. It is for people looking to save for the long term and not withdraw funds for other purposes than buying a first home or retirement.

How do Lifetime ISAs work?

Lifetime ISAs operate by allowing individuals to contribute funds, up to £4,000 per tax year, until the age of 50, with the government adding a 25% bonus. So if you put in £4,000 per year, the Government will contribute £1,000. This money can be used for the purchase of a first home at any time, once the account is open for 12 months, or withdrawn tax-free after the age of 60 for retirement.

Is the Lifetime ISA the same as the Help to Buy ISA?

While both share the goal of assisting homebuyers, the Lifetime ISA is different from the Help to Buy ISA, offering greater flexibility with withdrawals, a higher savings limit and a bigger maximum house price limit, as well as the potential for a retirement savings option. The Help To Buy ISA can no longer be opened, but savers can transfer funds from their Help To Buy ISA into a Lifetime ISA.

Are there different types of Lifetime ISA?

Yes, individuals can choose between cash or stocks and shares Lifetime ISAs based on their risk appetite and investment preferences. The cash ISA is often seen as having lower risk and you simply benefit from the interest rate offered by the provider as well as the Government bonus.  With a Stocks and Shares ISA, your money is invested into the stock market, so while it can go up, it also has the potential to go down if the stock market falls.

What can I use a Lifetime ISA for?

A Lifetime ISA can be used for:

• The purchase of a first home – Once the account is open for 12 months, with a maximum house price of £450,000. If buying in a couple, you can use both accounts.
• Withdrawn after the age of 60 for retirement – You can pay into your account until the age of 50, but your bonus will stop after the age of 50. Money can be drawn out at the age of 60.
• For other circumstances, subject to penalties – You can draw your money out at any time but, apart from limited reasons, you face a 25% penalty on your ISA. This means you could lose your  Government bonus and more.

Can I withdraw my money at any time?

Withdrawals before the age of 60 for non-home purchase or retirement purposes are subject to penalties, including a government withdrawal charge, which is a penalty of 25% of the amount in the account. This effectively means you would lose your bonus and more, so you have to be sure that you are saving the money entirely for a first home or retirement.

How do I open a Lifetime ISA?

Opening a Lifetime ISA involves choosing a provider, completing the necessary paperwork, and making an initial contribution, which can be as little as £1. You will need proof of identification and your address. Some providers use an app that you can download and others allow you to open an account online or in the branch.

Are there any restrictions?

Yes, there are restrictions on the amount an individual can contribute annually, which is £4,000 and the purposes for which the funds can be withdrawn penalty-free. You can only open an account over the age of 18 and up to the age of 39 and must buy a property for no more than £450,000. You also must not have owned a property anywhere in the world before, including inheriting a property.

When do I get my Lifetime ISA bonus?

The government bonus is added monthly, calculated as 25% of the contributions made during that period.

What are the advantages and disadvantages of a Lifetime ISA?

Advantages include government bonuses and flexibility, while disadvantages may include penalties for early withdrawals.

• 25% government bonus - This is a great bonus compared to almost any other savings accounts
• Transfers are free - Once your Lifetime ISA is opened, you can transfer it to another LISA provider if you spot a better deal. You can also transfer money from another ISA or a Help to Buy ISA into your LISA.
• Savings covered up to £85,000 - Your money in both cash and investment Lifetime ISAs benefit from the protection of the Financial Services Compensation Scheme, so your money is protected up to the first £85,000 if the provider goes bust.

• Tax Free Savings – The interest paid by the provider is tax-free.
• Option to use with other schemes - You can use the Lifetime ISA with other schemes including shared ownership and Help to Buy loans. However, if you’re buying with a shared ownership scheme the £450,000 price cap applies to the full sale price of the house not just the share you initially buy.
• Not limited to new builds - You can use the Lifetime ISA for any property up to the value of £450,000.

Disadvantages include penalties for early withdrawals, limits on saving allowance and a maximum property price.

• Wait at least a year - You’ll need to have had the LISA opened for at least 12 months before you can use it to buy a home

• Restrictions of use – The money must either be used to buy a first home or retirement, or you will face a withdrawal penalty. The Lifetime ISA can also only be used to buy the home you intend to live in.
• £4,000 a year limit - You can invest up to £4,000 every tax year into your Lifetime ISA.
• Penalty for withdrawals - If you need the money for anything other than buying your first home or retirement once you reach 60, you face a 25% penalty on your ISA.
• Age limit- You will need to open your Lifetime ISA before you turn 40 and your bonus will stop after the age of 50.
• First home must be under £450,000 - The home you buy has to have a maximum value of £450,000.

Are all Lifetime ISAs the same?

No, Lifetime ISAs may differ in terms of providers, interest rates, and investment options so make sure you choose a provider that is right for you.

How do I find the best Lifetime ISA?

Finding the best Lifetime ISA involves researching providers, considering fees, and assessing the investment options that align with individual financial goals. Think about asking others who use different provides for a review or looking at online reviews.

Can I transfer a lump sum into a Lifetime ISA?

Yes, individuals can transfer existing savings or investments into a Lifetime ISA, up to the annual contribution limit of £4,000.

What are the best Lifetime ISAs?

The best Lifetime ISA depends on individual preferences, considering factors such as interest rates, fees, and investment options.

3 of the best current providers we have found are:

Moneybox – 5% (inc fixed 0.85% 1 yr bonus). This is an app, which many young people find more convenient. You can transfer from other ISAs and interest is paid monthly.

Bath Building Society – 3.79%. You can apply for this product online or in a branch and interest is paid annually but you can’t transfer from other ISAs.

Beehive Money – 3.5%. This is another app. Interest is paid annually and you can transfer from existing LISAs to its Homebuyer LISA.

Can me and my partner both have a Lifetime ISA?

Yes, both partners can have individual Lifetime ISAs if you are both first-time buyers, potentially doubling the government bonus, but the maximum house price value still remains at £450,000, even if you use both accounts to fund your deposit.

Can I use a Lifetime ISA with Shared Ownership?

Yes, Lifetime ISAs can be used in conjunction with Shared Ownership schemes, providing additional flexibility in saving for a home, however, if you’re buying with a shared ownership scheme the £450,000 price cap applies to the full sale price of the house not just the share you initially buy.

How do I use my Lifetime ISA for retirement?

Funds in a Lifetime ISA can be withdrawn tax-free after the age of 60 for retirement, providing a valuable source of retirement income, however, bonus contributions are not paid once you turn 50.

Are there any risks with a Lifetime ISA?

While Lifetime ISAs offer benefits, risks may include penalties for early withdrawals and fluctuations in investment values for stocks and shares ISAs, so your appetite for risk and long-term financial goals will be a key factor when choosing which Lifetime ISA is best for you.