Lifetime Isa guide: How they work and how to save and invest

Lifetime Isas allow under-40s to save for a home and retirement at the same time and the Government offers 25 per cent top-ups on contributions, worth up to £32,000 if you max out your fund.

That sounds like a big giveaway, but these Isas have sparked a barrage of criticism, amid fears younger savers could make poor financial decisions and be left out of pocket in the longer run by shunning pensions.

However, for those under-40, saving for a deposit for a first home, who have never owned a property anywhere in the world before and meet the other qualifying criteria, the 25 per cent uplift on up to £4,000 per year paid in, may seem a no-brainer. 

We look at how Lifetime Isas works, what types of products are available, and their benefits and pitfalls.

Giveaway: Government is offering free top-ups worth up to £32,000 if you max out your fund, but most young people are likely to empty it when they buy a home

For those weighing up whether to open a Lifetime Isa – or give money to a younger family member to do so – we explain what issues to consider beforehand.

But savers should be aware that there are few providers in the marketr, particularly for savers wanting a cash Lifetime Isa.

This is a particular issue for homebuyers making a purchase in the relatively near future, looking to avoid the short-term risks of putting their money in an investment Lifetime Isa and seeing shares crash just as they need the cash.

How do Lifetime Isas work?

* A cash bonus worth up to £1,000 a year will be added to every £4,000 saved into a Lifetime Isa.

* You need to be aged 18-40 to open one, and you can only use the money to buy a first home, or else face a stiff 25 per cent penalty on any withdrawals before you hit the age of 60.

Buying a home with a Lifetime Isa 

You can use your Lifetime Isa savings and bonus to help you buy your first home if all the following apply:

  • The property costs £450,000 or less you buy the property at least 12 months after you make your first payment into the Lifetime ISA 
  • You use a conveyancer or solicitor to act for you in the purchase – the ISA provider will pay the funds directly to them 
  • You’re buying with a mortgage 

* You can keep your money in cash, or put it into stocks or investment funds, as with other Isas.

* Your savings and the bonus can be used towards a deposit on a first home worth up to £450,000 – and the deal allows two first-time buyers to both earn bonuses then pool their resources to buy a home.

* All savers under 40 can open a Lifetime Isa, including those who already own a home and are saving into a pension.

* You can carry on earning bonuses until you are aged 50, so you could be in line for a Government handout worth £32,000 in total if you save £4,000 every year from the age of 18. 

* When you turn 50, you will not be able to pay into your Lifetime Isa or earn the 25% bonus. Your account will stay open and your savings will still earn interest or investment returns.  

* The overall annual Isa allowance is £20,000 and the Lifetime Isa falls within this. 

* You can only take out one Lifetime Isa a year, but you can take them out with different providers in other years. This will allow you to keep your savings under the £85,000 level with any single operator, and therefore qualify for a payout from the Financial Services Compensation Scheme if an Isa provider goes bust. 

* Those with a Help to Buy Isa can transfer those savings into a Lifetime Isa. However, you can only use the bonus from one to buy a house. The Help to Buy Isa will be closed to new savers in November 2019, but those who already have them can still pay in until 2029.  

* In addition to withdrawing your money from the Lifetime Isa to buy a home, you can also do so without penalty if you fall terminally ill.

Risk warning: Auto-enrolment means employers have to pay into your pension, so you will miss out on these free contributions if you divert cash into a Lifetime Isa instead

Risk warning: Auto-enrolment means employers have to pay into your pension, so you will miss out on these free contributions if you divert cash into a Lifetime Isa instead

What Lifetime Isa products are available?

None of the big banks have rushed to open Lifetime Isas. 

This dearth of products could pose problems for young homebuyers wanting a cash Lifetime Isa for a relatively short period, since the usual rule of thumb is to avoid investment risk if you will definitely need all the money within the next five years.

We round up the Lifetime Isas that are available below, and will update it as further announcements are made.

Cash Lifetime Isas

Skipton Building Society: Its cash Lifetime Isa can be opened with £1 and offers just 0.5 per cent annual interest. 

Nottingham Building Society: Its Beehive Lifetime Isa can be opened with £10 and  pays 0.8 per cent interest. 

Newcastle Building Society: A Lifetime Isa can be opened with £1 and Newcastle offers 0.5 per cent interest. 

Moneybox: The investing app has a cash Lifetime Isa that can be opened with £1. It pays 0.85 per cent but that drops to 0.25 per cent after a year 

Paragon Bank: The bank is offering a 0.5 per cent interest rate and the minimum deposit is £1. 

Some stocks and shares Lifetime Isas 

Hargreaves Lansdown: The Lifetime Isa minimum lump sum investment is £100, or the minimum monthly payment required is £25.

Investors pay a annual fee of 0.45 per cent on investment funds held and fund fees too, but fund dealing is free. For shares, investment trusts and ETFs this charge is capped at £45 per year but buying and selling costs £11.95 per time

You can either invest in any shares, funds or trusts you like, or opt for one of Hargreaves’ existing ready-made Isa portfolios, tailored for different investment needs. 

Nutmeg: The Lifetime Isa is available now, with a minimum lump sum requirement of £100.

What is an ongoing charge? 

The ongoing charge is the investing industry’s standard measure of fund running costs.

The bigger it is, the costlier the fund is to run.

The ongoing charge figure can be found in the Key Investor Information Document (KIID) for any fund, usually at the top of page two.

To track down these documents, put the fund name and ‘KIID’ together in an internet search engine. Read more here about investment charges.

Nutmeg customers are questioned about goals and risk appetite and can then be directed to the portfolio deemed to best match their needs.

The Lifetime isa has four investment options, ranging from the standard fixed allocation portfolios, with a 0.72 per cent annual charge, to Smart Alpha (1.04 per cent), Fully Managed (1.02 per cent) and Socially Responsible (1.14 per cent) options. 

AJ Bell: The AJ Bell Youinvest Lifetime Isa offers access to all the broker’s funds, shares, investment trusts, ETFs, gilts and bonds, allowing investors to build their own portfolios. 

The annual charge is 0.25 per cent, and you can either kick off with a minimum lump sum of £500, or just start putting away £25 a month under a regular investment plan. 

Moneybox: The mobile app aims its Lifetime Isa at those saving a deposit for their first home, rather than pitch it as a way to save for retirement. 

When you sign up, they offer you a choice of three risk-rated portfolios – cautious, balanced and adventurous. 

They give you exposure to cash, global equities and global property equities through three passive funds run by Henderson Asset Management, Vanguard and BlackRock. 

Moneybox lets you start  investing with just £1. 

It charges £1 a month to cover transaction fees and also has a platform fee of 0.45 per cent. 

Investors pay fees for the tracker funds on top of this, which range from between 0.12 and 0.3 per cent per year.

Lifetime Isas in the workplace

Some of the big workplace pension providers are making Lifetime Isas available to younger workers as a savings option alongside their other retirement products, as part of wider work benefits packages. Employers will not be allowed to contribute into Lifetime Isas, only pensions.  

What should you consider before opening a Lifetime Isa?

The main benefits of the Lifetime Isa are the free Government 25 per cent bonuses on up to £4,000 per year paid in, and the flexibility of being able to save for a first home and retirement at once.

Whether these advantages are actually meaningful to you personally depends on whether they are outweighed by any or some of the many drawbacks highlighted by financial experts. 

Ask yourself the following questions:

Are you prepared to risk losing a quarter of your savings – including the bonuses and any interest or investment growth you have built up to date – if you need to make an emergency withdrawal?

That’s a hefty loss, so you need to be sure you’re ready to lock up your money until you buy a home or are on the verge of retirement.

Are you planning to empty your Lifetime Isa pot when you buy a home?

After you’ve passed the milestone of buying a home, the Lifetime Isa turns into an inferior retirement product when compared with a workplace pension.

Auto-enrolment rules mean employers have to pay into your pension. That means you’ll be forgoing free money by sticking with a Lifetime Isa instead of squeezing the maximum contributions possible out of your employer between the point when you buy a home and your retirement.

The Lifetime Isa is only a decent retirement savings vehicle for the self-employed, who don’t receive employer contributions towards their pension.   

 Are you planning to use a Lifetime Isa for five years and are you ready to take the plunge into investing and its risks?

If you are planning to buy a home within five years, it makes sense to open a cash Lifetime Isa and grab any bonuses going during that period. Any period shorter than this is less than the timescale financial advisers traditionally recommend for investing over saving.

But stick with cash for any longer than that and you are missing the opportunity for better returns.

The hard work and risks of investing are practically invisible to people saving into workplace pensions. The vast majority are in a default fund, and don’t have to think much about how their investments are managed. If you intend to hold an investment Lifetime Isa, you will have to be more proactive and knowledgeable.

Many financial experts think one of the biggest risks of the Lifetime Isa is that young people will simply open a cash version and stick with it, potentially losing thousands of pounds of investment returns over the decades.

That’s on top of missing employer contributions into a pension, if they hang onto their Lifetime Isa as a retirement product after buying a home.

Might you need to fall back on benefits at any point in your life?

Lifetime Isa savings will be taken into account if you ever need to claim benefits, but pension savings are not included in the assessment.

If you are in a weak financial situation or in the kind of precarious employment where you might have to rely on state benefits at some time in the future, any savings you build up will be protected in a pension pot.

What income tax rate are you on?

The Government pays tax relief on contributions to pension pots, in line with the principle that we all save for retirement out of untaxed income. 

It does this based on income tax rates of 20 per cent, 40 per cent or 45 per cent. So if you earn too little to pay income tax or are on the basic rate of 20 per cent, the Lifetime Isa bonus is a fair deal, especially if your primary goal is to buy a home. 

But if you are on the 40 per cent or 45 per cent rate, you will get more money from the Government if you stick with saving into a pension.

Your Lifetime Isa fund will be tax-free when you eventually withdraw it, but your payments into the pot come from taxed income. The Lifetime Isa bonus evens the field for basic rate taxpayers, but not for those on the higher rates.

With pensions, higher rate taxpayers get an extra boost at the outset from more tax relief – increasing the size of the initial fund which then benefits even more from investment compound growth.

Pension withdrawals will be taxed as income in retirement, but many people end up on a lower rate in retirement than when they were earning a salary, so the overall system works in their favour. 

Compare the best DIY investing platforms and stocks & shares Isa

Lifetime Isa guide: How they work and how to save and invest

Investing online is simple, cheap and can be done from your computer, tablet or phone at a time and place that suits you.

When it comes to choosing a DIY investing platform, stocks & shares Isa or a general investing account, the range of options might seem overwhelming. 

Every provider has a slightly different offering, charging more or less for trading or holding shares and giving access to a different range of stocks, funds and investment trusts. 

When weighing up the right one for you, it’s important to to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.

To help you compare investment accounts, we’ve crunched the facts and pulled together a comprehensive guide to choosing the best and cheapest investing account for you. 

We highlight the main players in the table below but would advise doing your own research and considering the points in our full guide linked here.

>> This is Money’s full guide to the best investing platforms and Isas 

Admin charge Charges notes Fund dealing Standard share, trust, ETF dealing Regular investing Dividend reinvestment
AJ Bell YouInvest 0.25%  Max £3.50 per month for shares, trusts, ETFs.  £1.50 £9.95 £1.50 1% (Min £1.50, max £9.95)  More details
Bestinvest 0.40%  Account fee cut to 0.2% for ready made investments Free £4.95 n/a n/a More details
Charles Stanley Direct 0.35%  No platform fee on shares if a trade in that month and annual max of £240 Free £11.50 n/a n/a More details
Fidelity 0.35% on funds £45 fee up to £7,500. Max £45 per year for shares,  trusts,  ETFs Free £10 Free funds £1.50 shares, trusts ETFs £1.50 More details
Hargreaves Lansdown 0.45% Capped at £45 for shares, trusts, ETFs Free £11.95 £1.50 1% (£1 min, £10 max) More details
Interactive Investor  £119.88 as £9.99 per month £7.99 per month back in trading credit £7.99 £7.99 Free £0.99 More details
iWeb £100 one-off £5 £5 n/a 2%, max £5 More details
Freetrade Free for standard account £3 month for Isa  Freetrade Plus with more investments is £9.99/month inc. Isa fee No funds  Free  n/a  n/a  More details 
Vanguard  0.15%   
Only Vanguard funds
Free  Free only Vanguard ETFs  Free  n/a  More details 
(Source: March 2022. Admin charges quoted annually, may be monthly or quarterly)


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