Lifetime ISA rules, rates and limits

Lifetime ISAs (LISA) are a tax-efficient way to save money towards your first home or later life that will earn you a bonus of 25% on what you save. To help you understand how a Lifetime ISA works and decide if it is right for you, we've put together some information on the most important rules, limits and costs.

Please note, this is not a complete list of Lifetime ISA rules but an overview of some of the most helpful. For a full list of Lifetime ISA rules visit the website here.

Lifetime ISA limit and allowance

With a Lifetime ISA you're allowed to subscribe up to £4,000 as part of the maximum ISA allowance of £20,000 for this tax year. This means that if you have a Lifetime ISA and you invest £4,000, you will only be able to invest up to £16,000 in your other ISAs.

Similarly, if you transfer another type of ISA into your Lifetime ISA, the amount you transfer in will take up part of your total Lifetime ISA limit.

You can have more than one Lifetime ISA, but you can only open and subscribe into one per tax year. When it comes to buying your first home, you can only use the government bonus from one of your Lifetime ISAs.

Lifetime ISA interest rates and returns

If you open a Cash Lifetime ISA, different providers will offer different interest rates, but you will likely receive an interest rate of around 1% AER variable to be paid annually.

Stocks and Shares Lifetime ISAs carry more risk but the potential returns are greater than with a Cash Lifetime ISA, especially if you plan on investing over a long period of time.

Lifetime ISA bonuses

With a Lifetime ISA you will receive a bonus of 25% from the government on the money you save, up to a limit of £1,000 for this tax year (based on 25% of current £4,000 limit). You can use these bonuses towards the purchase of your first home or you can withdraw your savings including the bonuses the day you turn 60.

The bonus you receive is based on what you put in, so it doesn't matter what interest you receive on a cash Lifetime ISA, or what gains you make with a Stocks and Shares Lifetime ISA, the bonus will still be the same.

Your 25% bonus will be paid monthly and adds to the income you can earn on the total amount in your account. However, income earned on the bonus amount does not count towards your £4,000, so you can't use it to claim more of a bonus.

Penalties for withdrawing early

If you withdraw your money from a Lifetime ISA for any reason other than buying your first home, after your 60th birthday or if you are terminally ill, you will be charged a withdrawal penalty by HMRC. This is equivalent to 25% of the amount you withdraw, meaning that unless your chosen investments rise considerably in value, you will get back less than you put in.

For example, if you subscribe £1,000, you will receive a 25% government bonus of £250, taking your total to £1,250. If you withdraw all the money prematurely, the 25% charge will be applied to the total amount. In this case that is £312.50. So you'd only receive £937.50, £63.50 less than you initially invested.

The 25% penalty is the same whether you have a Cash Lifetime ISA or a Stocks and Shares Lifetime ISA.

Lifetime ISA rules for first-time home buyers

You can use the money you've saved and the government bonus towards the exchange of your first home. If you plan to use a Lifetime ISA for buying a property, you must be a first-time buyer and purchasing your first home. If you have owned a property in the past then you cannot use your Lifetime ISA for this purpose. This includes any property in a different country that you may have owned.

You must be buying a residential property in the UK for less than £450,000. If the property you wish to purchase costs more than £450,000 then you cannot use your Lifetime ISA towards the exchange.

The property you are purchasing must have a mortgage against it, you cannot buy the property with cash.

You must be intending to live in the property - you cannot use your Lifetime ISA savings for purchasing buy-to-let properties.

If you are buying a property with another person, you can combine your Lifetime ISAs and government bonuses, provided you are both first-time buyers. If one of you has owned a property before that person cannot contribute their Lifetime ISA towards the property purchase.

You must have subscribed to a Lifetime ISA for at least 12 months to be able to use it to buy a home. The purchase must then be completed within 90 days of your conveyancer receiving the funds from your Lifetime ISA manager. Your conveyancer can request an extension via the Lifetime ISA manager should there be an unforeseen delay in completion.

There is no minimum amount you need to subscribe to get started. You can also choose how you save money; you can make regular payments via direct debit or pay in 'lump sums' at a time that suits you.

The funds from your Lifetime ISA will go straight from the bank to the conveyancer handling the property purchase. The conveyancer must be eligible in order for the Lifetime ISA manager to release the funds for purchase. Find out more.

You are allowed to have a Help to Buy ISA and a Lifetime ISA open at the same time, but you cannot use government bonuses from both to buy a property.

You can transfer your Help to Buy ISA in to your Lifetime ISA, provided it doesn't exceed the £4,000 limit for this tax year.

More information about Lifetime ISA vs Help to Buy ISA

Lifetime ISA rules for saving for later life

When you reach the age of 50, you will no longer be able to subscribe into your Lifetime ISA and receive further 25% government bonuses. However, your account will remain open and you may still earn interest or returns on your investment, depending on your Lifetime ISA type. This means you have a maximum of 32 years to subscribe money into your Lifetime ISA, assuming you open the account at age 18. The longer you wait to open one, the less time you have to subscribe and the smaller your government bonus will be.

If you are saving for later life, you can access your Lifetime ISA funds without penalty when you reach age 60. You will incur a 25% charge on any money you withdraw before you are 60 unless you are using it to buy your first home or are terminally ill.

You may also incur this charge if you transfer your Lifetime ISA to another type of account.

Generally speaking, if you have a workplace pension, a Lifetime ISA won't provide as much for your retirement. But a Lifetime ISA can be a good way to supplement your pension and support you in later life.

Lifetime ISA costs

If you have a Lifetime ISA with The Share Centre, there are no account fees, dealing fees, or initial fund charges to pay.

Your fund’s annual management charge and ongoing charge are taken from the fund itself, so you don’t need to worry about paying them separately.

Other Lifetime ISA providers will have their own cost structures, so you should do some research before choosing a provider.