Lifetime ISA FAQ

What is the Lifetime ISA?

The Lifetime ISA is a new government savings initiative to encourage millennials to save for their first home or retirement – savers receive a 25% government bonus on their contributions. The Lifetime ISA forms part of the UK government’s family of individual savings accounts (ISAs).

When will I be able to open one?

The government launched the Lifetime ISA on 6th April 2017, so you can open one now, provided you’re eligible. However, at the time of writing, only a few providers are offering one.

Who can have a Lifetime ISA?

Any UK resident aged 18–39 can open and save into a Lifetime ISA. Your first contribution must be made before your 40th birthday — just opening an account is not enough.

How much can I contribute?

If you’re eligible to have one, you can save up to £4,000 each year in a Lifetime ISA.

What can I use it for?

You can put your savings, along with the government bonuses and any interest or returns earned, towards:

  • buying your first home up to a value of £450,000
  • anything you like once you’re 60

What makes the Lifetime ISA so attractive?

The government will give you a 25% bonus on every contribution you make until you’re 50. So, for every £4 you invest you receive a £1 top-up. That’s a potential bonus of £1,000 each year to put towards your first home or retirement.

And, because it’s a type of ISA, you don’t pay tax on the growth, returns or interest – for your savings and the bonus.

You can choose to use these savings to buy your first home worth up to £450,000, or keep it in savings until you turn 60. For both options, you can withdraw your money (including the 25% government bonus) tax-free.

How much can I save?

You can contribute up to £4,000 each year until the day before you turn 50. For every £4 you contribute, the government will give you a £1 bonus, up to a maximum £1,000 per year.

For example: You start saving in a Lifetime ISA when you’re 18 and you contribute the maximum £4,000 allowance every year until you’re 50. Over this period, you’ll contribute £128,000 and receive £32,000 in government bonuses, totalling £160,000. As to how much further this will grow in terms of interest or investment returns will depend on whether you choose a cash Lifetime ISA or stocks and shares Lifetime ISA.

Can I pay in more than £4,000 to a Lifetime ISA each tax year?

No. The maximum amount you can contribute to a Lifetime ISA each year is £4,000. If you'd like to save more than £4,000 a year in an ISA, you could pay £4,000 into a Lifetime ISA and then save the rest into a stocks and shares ISA or cash ISA up to the overall 2017/2018 ISA allowance of £20,000.

For how long can I contribute to a Lifetime ISA?

You can contribute to the Lifetime ISA until the day before you turn 50.

When will I receive the 25% government bonus?

For the 2017/18 tax year, the government bonus will be paid into your Lifetime ISA as a lump sum after the end of the tax year.

From April 2018, the bonus will be paid monthly, giving the free money even more chance to earn interest.

Can I access my savings?

Yes, but only to buy your first home up to a value of £450,000, when you’re 60+, or if you're terminally ill.

Your Lifetime ISA must be open for at least 12 months before you can withdraw funds from it to buy your first home.

If you need to access your savings for any other reason, you’ll pay a hefty penalty. The government will charge you a 25% penalty on the total value of the withdrawal, so you may get back less than you put in.

For example: say you invest £4,000. Add to that the 25% government top-up and you’ll have £5,000. If you choose to withdraw the money for a ‘non-eligible’ reason, you’ll be penalised 25%, which equates to £1,250. Leaving you with £3,750: £250 less than your initial £4,000 investment. Savers need to watch out for this.

The cost of early withdrawal

Your contribution £4,000
+ Government bonus £1,000
= Total value £5,000
- 25% penalty (£1,250)
= Remaining £3,750

Is it a cash ISA or stocks and shares ISA?

The Lifetime ISA is available as a cash ISA or a stocks and shares ISA. Nutmeg only offers a stocks and shares Lifetime ISA.

Should I open a cash Lifetime ISA or stocks and shares Lifetime ISA?

It’s up to you to decide whether saving in cash or investing in stocks and shares is right for you. For the Lifetime ISA, a big part of this will depend on your goals, timeline and attitude to risk.

As a rule of thumb, cash is a safer bet for short-term savings. If you’d like to use the Lifetime ISA to save for your first home and you plan to buy it within the next three years, saving in cash is probably best.

On the other hand, a stocks and shares ISA offers the possibility of better returns in the long run. For example, if you’re planning to buy your first home in three years’ time or longer, or you’re saving for your retirement, investing in stocks and shares may suit you. Bear in mind that the value of your investment may fall and you could lose money.

You can use the Nutmeg Lifetime ISA calculator to get an idea of how much you could save in stocks and shares Lifetime ISA.

Can I contribute to a stocks and shares ISA and a Lifetime ISA in the same year?

Yes, you can contribute to both a ‘regular’ stocks and shares ISA and a stocks and shares Lifetime ISA in the same tax year. You can hold one Lifetime ISA alongside other cash, stocks and shares, or innovative finance ISAs, all within your annual ISA allowance of £20,000.

For example: if you invest the maximum £4,000 a year into a Lifetime ISA, you’ll have another £16,000 allowance to invest or save in other ISAs.

Can I transfer other ISAs into a Lifetime ISA?

You can transfer any other ISAs you have into the Lifetime ISA, up to the maximum of £4,000 per year.

Can I withdraw from my Lifetime ISA?

Take a look at Can I access my savings?

I’m not sure what I’m saving for. Should I have a Lifetime ISA?

If you’re not planning to buy your first home, you need to be certain that you can leave the money in the ISA until you’re 60. If accessing your money before you’re 60 for other reasons is important, you might be better off with a different type of ISA.

A Lifetime ISA may not be right for everyone

As with all investing, your capital is at risk. Tax rules may change in the future. If you are unsure if a Lifetime ISA is the right choice for you, please seek independent financial advice.

  • You must be 18–39 years old to open one.
  • If you need to withdraw the money before you’re 60, and it’s not for the purchase of a first home up to £450,000, or a terminal illness, you’ll pay a 25% government penalty. So you may get back less than you put in.
  • Compared to a pension, the Lifetime ISA is treated differently for tax purposes. You may be better off contributing to a pension.
  • If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions.