How to open a Lifetime ISA

Ready to get saving for your first home? Or even retirement? A Lifetime ISA is a great option, you’ll get a juicy 25% bonus from the government on everything you save (up to £4,000 per year).

Nuts About Money tip: if you are looking to save for retirement, a pension could be a better option. Learn more with our guide to a Lifetime ISA vs pension.

A Lifetime ISA is easy to open too, and you can be up and running in 3 easy steps:

1. Decide which type of ISA you want (either a Cash Lifetime ISA or Stocks and Shares Lifetime ISA (explained below))
2. Find a great LISA provider (we can help here)
3. Add money (you can start with just £1)

Sounds easy right? And it is. Let’s run through those now, and the ins-and-outs of LISAs below.

1. Decide which type of ISA you want

There’s two types of LISAs, a Cash LISA and a Stocks and Shares LISA…

A Cash LISA is what you’ll likely be more familiar with, it’s just like a savings account with your bank. You add money, and you earn interest on your money. All the interest you make will be tax-free, and you’ll get the 25% bonus from the government too.

A Stocks and Shares LISA is where instead of your money earning interest, you can invest your money with the aim of growing your money over time (typically more than saving cash). 

You can invest in a whole range of things, such as shares of companies (ownership of companies), and investment funds (groups of lots of investments (such as shares) all pooled together, and typically managed by experts).

If you’re not experienced in investing, it’s often best to let the experts handle things, and pick a LISA provider that offers that (more on those below). If you are experienced, then the world’s your oyster, and you can pick a LISA provider who offers a wide range of investment options.

For a bit of help deciding between the two options, most people opt for a Cash LISA, as they’re a bit easier to understand, and the interest rates are pretty great these days. However, if you’re planning to keep your LISA for 5 years or more, you’ll more than likely make more money with a Stocks and Shares LISA (and leaving it to the experts), but there’s no guarantees.

2. Find a great LISA provider 

Next up, it’s time to find which Lifetime ISA provider you want to go for.

There’s a fair few out there, all with different services, some have a great modern mobile app to use, so you can manage your savings, and add money whenever you like – and these ones tend to have the best interest rates too.

You’ll also be able to open a LISA within minutes with the modern ones – you’ll just need things like your National Insurance number and a driving licence or passport.

Some are very traditional where you’ll have to sign up on a website (or within a branch), and have to wait a few days to be approved, and then only get your government bonus added every year. The more traditional ones tend to have the lowest interest rates too.

Don’t worry if you’re not 100% confident with a provider yet, you always have the option to transfer your LISA to a different provider in future – and your money is safe whichever provider you choose.

To make things much easier for you, we’ve reviewed all the best LISA providers, and we’ve even put together the top 10 LIfetime ISA providers. As a summary, here’s the top 3:

Best Lifetime ISAs

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If you’re keen to learn more about providers for the different types of LISA, here’s the best Cash LISA providers and the best Stocks and Shares LISA providers.

3. Add money

Finally, and this bit is easy, all you need to do is add some money.

Once you add at least £1, the timer starts on your LISA, and you’ll be able to use it to buy your first home after 12 months.

Of course, it’s best to save as much as you can! The more you can save, the more free cash you’ll get from the government. You can save as much as £4,000 every tax year (April 6th to April 5th the following year), and get a massive £1,000 free from the government.

It can be tough to budget for, but if you’re able to set up an automatic monthly savings amount, your money will grow and grow, and you won’t have to worry about it – it will soon add up, and have a massive impact on your house deposit.

The ins-and-outs of Lifetime ISAs

Not quite sure how everything works with a Lifetime ISA? Let’s run through it.

A Lifetime ISA is a government scheme to help you save for your first home, or retirement, with the highlights being that you can save completely tax-free, and you’ll get a huge 25% bonus on all the money you save (paid by the government).

You can save up to £4,000 per tax year (April 6th to April 5th the following year), but you can only save into one LISA each tax year – but you can transfer your LISA to another provider whenever you like.

This £4,000 counts towards your overall annual ISA allowance of £20,000 – which is how much you can save each tax year across all your ISAs (if you have them), such as a Cash ISA.

Note: an ISA stands for Individual Savings Account, and is a tax-free savings account.

As long as you’re aged between 18 and 39, you can open a LISA, and you can keep saving into it until you’re 50.

Primarily, they’re for saving for your first home, and you’re able to use it to buy a home if it’s worth less than £450,000, and you’ve had the LISA open (with money in it), for at least 12 months.

You’ll need to be a first time buyer too, so someone who hasn’t bought property before. You can also use it with a partner if you’re buying a home together (so use both of your LISAs), but you’ll both need to be first time buyers, otherwise, only the first time buyer can use theirs.

If you don’t use it for your first home, you’ll either need to wait until you’re 60 to access the cash, or you can withdraw it but pay a 25% penalty for doing so – which actually works out as more than the 25% bonus you get from the government (it sounds odd but the maths works out), so you’ll lose a bit of your own cash too.

Eligibility for a LISA

Let’s make that a bit clearer, if you’re thinking of opening a LISA, here’s the Lifetime ISA rules. You’ll need to:

• Be a UK resident
• Be aged between 18 and 39
• Be a first time buyer (someone who hasn’t bought their own home before)
• Buy a home for less than £450,000
• Buy a home with a mortgage
• Live in your new home (e.g. you can’t buy to rent it out)
• Have your LISA account open for least 12 months

Saving for retirement?

A LISA can also be a good option to save for retirement, as everything you make within a LISA is tax-free, and you’ll get the 25% government bonus – and with a Stocks and Shares LISA, you’ll be able to make similar investments to what you would do within a pension, to grow your money sensibly all ready for a comfortable retirement.

Nuts About Money tip: it’s not typically the best idea to use a Cash LISA for retirement saving, as your money isn’t likely to grow too much each year, especially when compared to a Stocks and Shares LISA over time (as long as it’s invested sensibly).

However, you also have the option of saving within a pension, and for most people, these can be a better option. As we mentioned, pensions are designed to grow sensibly over time, with retirement as the goal, whereas with a Lifetime ISA, you’ll need to customise it for retirement by making your own investment decisions.

And, pensions have tax-free saving advantages too – you’ll also get a 25% bonus from the government when you add cash, which is to refund the tax you’ve paid on your income (at 20%), called tax relief.

Plus, with a pension, if you’re a higher rate taxpayer (paying 40% tax and earning over £50,270 per year), or an additional rate taxpayer (paying 45% tax and earning over £125,140 per year), you can claim some of the tax back that you’ve paid at these rates too (on a Self Assessment tax return) – which is a huge amount to save, making a pension much better than a LISA. If you want help with you Self Assessment, TaxScouts¹ can help you, their service is rated 5 stars.

Your money grows tax-free as well, although you will likely pay tax on some of it when you withdraw it later on. 25% is completely tax-free, but you might pay Income Tax on the remaining 75% depending on your total income at the time, and how much you withdraw.

There’s also other benefits such as getting access to your money earlier, at 55 (57 from 2028) rather than 60, and a pension doesn’t count towards any Inheritance Tax should you sadly pass away.

Anyway, if you’re keen to learn more about both options, here’s our guide to a Lifetime ISA vs pension. And if you’re keen to learn more about pensions, here’s our guide to private pensions and the best private pensions.

What happens when I want to use the money?

When you’re ready to buy your first home, it’s time to put your LISA to work! All you need to do is let your conveyancer know (your solicitor involved with the property purchase), that you’ve got a LISA and you want to use it.

They’ll take care of all the paperwork, and your LISA provider will transfer the funds to them when it’s time to send the money and buy your lovely new home. As simple as that.

If you’re using your LISA for retirement, or later in life, you’ll need to wait until you’re 60, and then you can simply withdraw the money, tax-free, to your bank account.

Transferring your Lifetime ISA

If you’ve already got a LISA, you’re free to transfer your LISA to another provider whenever you like. Or, if you’re just signing up for a LISA now, it’s good to know you’re not stuck with the provider you first sign up with forever – although if you pick a great one now (like Tembo¹) you shouldn’t need to.

Well, to transfer a LISA, simply get in touch with your new LISA provider, and they’ll take care of the whole process for you. Simple right? Your money will simply turn up in your new LISA account after a short while (normally a few weeks), and if there’s any government bonuses due, they’ll turn up too.

You can even transfer a Cash ISA or Stocks and Shares ISA (which are not Lifetime ISAs) to a Lifetime ISA too (but you’ll need to stick to under £4,000 this tax year).

Are Lifetime ISAs safe?

Yep! Using a Lifetime ISA is perfectly safe.

Lifetime ISA providers need to be authorised by the Financial Conduct Authority (FCA) in order to provide you with a LISA. They’re the people who make sure financial companies are looking after you and your money.

This means your money is also protected by the Financial Services Compensation Scheme (FSCS). This can give you compensation of up to £85,000 should anything happen to the LISA provider (such as going out of business), and your money not returned.

With Stocks and Shares LISAs, your money can go up and down, depending on the investments. And the investments themselves are held securely with large banks and financial companies.

Let’s recap

That’s it for opening a Lifetime ISA. Easier that you thought? These days, modern Lifetime ISA providers are really great, and offer an easy to use mobile app or website, where you can sign up in just a few minutes.

And, they often offer the highest rates for cash saving, and expert-managed options for investing (via a Stocks and Shares LISA).

As a recap, our top pick is Tembo¹, it’s one of the highest interest rates out there, is easy to use, and the app is great. Moneybox¹ is great too, but the interest rate drops after 12 months.

Don’t forget, you’ll need your LISA open for at least 12 months before you can use it, so it’s a good idea to get started with a LISA as soon as you can – just add £1 into it until you’re ready to save more.

All the best with your saving!