ISA vs Lifetime ISA - should I invest into an ISA, a LISA or both?
We look at how to invest tax efficiently, the comparisons between a Stocks and Shares ISA and Lifetime ISA, and what to watch out for if you choose to have both.
Last Updated: 9 August 2023
Both Stocks and Shares ISAs and Lifetime ISAs (LISAs) offer some of the most generous tax perks around, and lots of people take advantage of both. We don’t think it’s a case of choosing one over the other, but there are some limitations to consider.
This isn’t personal advice. Product and tax rules can change, and any benefits will depend on your circumstances. All investments can rise and fall in value, so you could get back less than you put in. If you’re not sure what’s right for you, ask for financial advice.
What is a Stocks and Shares ISA?
A Stocks and Shares ISA is a tax-efficient way to invest and potentially grow your money. There’s no UK tax to pay on capital gains or income. It’s designed for any investor that’s a UK resident to help meet their medium to long-term financial goals.
You can pay in up to £20,000 each tax year. It can be a good tax-efficient option for those looking to invest for the future, while being able to make withdrawals, tax free, whenever you like.
What to watch out for with a Stocks and Shares ISA
If you take money out of an ISA it will normally lose its ISA status, so be careful when planning withdrawals. If you make a withdrawal and then put the money back in, it will normally count as a new payment using up (part of) your annual £20,000 limit. Bear in mind, some ISAs are flexible which means you might not lose your allowance if you take your money out. It’s always worth checking with your provider.
As with all investment accounts, you need to be happy with the risk of investing. The value of investments can rise and fall, so you could get back less than you put in.
What is a Lifetime ISA?
A Lifetime ISA is designed for people looking to save towards their first home or later life.
Depending on the provider, you can choose to hold cash or invest in the stock market.
Like a Stocks and Shares ISA, there’s no UK tax to pay on capital gains or income. You can pay in up to £4,000 each tax year, which counts towards your overall £20,000 ISA limit.
One main difference to a Stocks and Shares ISA is that, up until your 50th birthday, you’ll also get a 25% bonus added by the government on top of anything you pay in each tax year (up to £4,000). This means you could receive a £1,000 bonus each year.
A Lifetime ISA can help you meet your retirement saving goals, especially if you’re self-employed or a basic-rate taxpayer.
What to watch out for with a Lifetime ISA
There is a catch. You can only open a Lifetime ISA if you’re 18-39 and add money to it until your 50th birthday. And if you take money out before age 60 (for anything other than buying your first home worth up to £450,000), there’s usually a government withdrawal charge. This is currently 25%, so you could get back less than you put in, regardless of how well your investments do.
Let’s say you put £4,000 into your Lifetime ISA and receive the government bonus of £1,000. If you make a chargeable withdrawal of the full £5,000, you'd only get back £3,750, assuming the value of your investments hadn’t changed. This means you’ll lose the government bonus, plus an extra 5% penalty on top.
The 25% bonus might make the Lifetime ISA more attractive. But if you choose to invest, you still need to be happy with the risks of investing in the stock market.
Can you use a Lifetime ISA to buy a house?
Yes, you can use a Lifetime ISA to buy your first home, whether you plan to buy on your own, or with another person. You can put up to £4,000 each year into a Lifetime ISA, and the government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
If there are two of you saving towards a home, you can both have a Lifetime ISA, doubling up the allowances and bonuses on offer.
There are a few conditions that you need to meet to use your Lifetime ISA to buy a home:
- You must be under 40 years old when you open the Lifetime ISA
- You must have had the Lifetime ISA for at least 12 months before you use it to buy your first home
- The property you are buying must be worth £450,000 or less
- You must be buying the property with a mortgage
If you meet all of these conditions, you can use the Lifetime ISA towards the deposit on your first home. The money will be paid directly to your conveyancer or solicitor.
It's important to note that if you withdraw money from your Lifetime ISA before you are 60, for any other reason than buying a home, you will be charged a 25% penalty. This means that if you withdraw £4,000 from your Lifetime ISA, you will only receive £3,000.
Is a Lifetime ISA more tax-efficient than a pension?
This depends on your personal circumstances, like how much you earn and your tax status.
If your employer offers a workplace pension, that should be your first port of call for retirement savings.
Once your employer is making pension contributions at the maximum level they offer, or you don’t have the option of a workplace pension, then it could be more tax-efficient to use a Lifetime ISA, alongside a pension. Aiming for contribution levels of around 12%, over a 50-year working life, could be a sensible approach.
The best of both accounts – what to remember
Both accounts have great advantages, if you’re eligible to apply. You might choose a Stocks and Shares ISA to help you meet your more medium-term goals (like contributing towards a child’s wedding), and a Lifetime ISA to invest for longer-term goals (like retirement).
It’s important to understand the ins and outs of each before deciding whether to use them.
If you decide to make the most of both accounts, remember to be mindful of ISA contribution limits. You can only contribute up to £20,000 across all your ISAs in the same tax year (this includes Stocks and Shares ISAs, Lifetime ISAs, Cash ISAs and Innovative Finance ISAs). The government Lifetime ISA bonus doesn’t count towards the £20,000 limit.
The benefits of each account will depend on your circumstances. If you plan on investing, your timeframe should be at least five years.