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Personal finance

How to make the most of the Lifetime ISA – is it right for you?

A Lifetime ISA isn’t just for your first home, here’s a closer look at how else you can benefit from having one.

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 2 years old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

Lifetime ISAs (LISAs) were introduced to help people save for retirement or buy their first home. However, just because you might have a good workplace pension or your first foot on the property ladder, it doesn’t mean you can’t benefit from a LISA.

This article isn’t personal advice. ISA and tax rules can change, and any benefits depend on your circumstances. If you're not sure what’s right for your circumstances, ask for financial advice.

How do Lifetime ISAs work?

A LISA offers a tax-efficient way to save or invest towards your first home or retirement. You can open a LISA between the age of 18 and 39 and pay in up to £4,000 every tax year. In return you’ll get a 25% bonus from the government. This means you could get up to £1,000 for each year you save.

You won’t pay UK income tax on any savings income within a Cash LISA. If you have a Stocks and Shares LISA you don’t need to worry about paying UK income tax on dividends, or capital gains tax either.

After 12 months from the first payment, you can use the money for a qualifying first-time home purchase. Once opened, you can also continue to pay into a LISA until you’re 50 and withdraw money from age 60. This means you could use it to generate a retirement income that’s free of UK income or capital gains tax.

Any withdrawals that aren’t a qualifying first home purchase or after age 60, are usually subject to a 25% penalty, meaning you could get back less than you put in.

How else can you use a Lifetime ISA?

LISAs can be especially useful to groups like the self-employed, who aren’t included in auto-enrolment and don’t benefit from an employer pension contribution.

The 25% bonus boosts your savings in a similar way to basic-rate tax relief on a pension. Being able to access it early in times of financial stress (albeit subject to a penalty) can make it an attractive option to a group who might experience peaks and troughs in their income patterns.

Be aware though, savings outside a pension (like in a LISA) could affect your entitlement to means-tested state benefits.

Lifetime ISA vs Pension – which is best if you're self-employed?

A LISA can also be used as a valuable addition to your retirement income. You could draw an income from your LISA to help bridge the gap between age 60 and State Pension age.

You might also find that drawing down from your LISA lets you have a more flexible approach to retirement where you work part time and supplement your income from a LISA. This could mean you’re able to leave your pension invested for longer, giving it the chance to grow.

MORE ON THE LIFETIME ISA FOR RETIREMENT

LISAs can also be used to help pay off an outstanding mortgage before you enter retirement. Continuing to pay mortgage costs into retirement can add a huge amount to your outgoings and put real pressure on your planning.

Saving into a LISA and benefitting from the government bonus means you could have enough by the time you hit 60 to pay it off, and help free up your finances.

Explore the LISA

Looking for investment ideas?

The government bonus helps boost your LISA pot, but you can help grow it even more by investing your money.

Remember though, unlike the security offered by cash, all investments fall as well as rise in value. So, if you choose to invest, you could get back less than you put in.

Lifetime ISA investment ideas

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Written by
Helen-Morrissey
Helen Morrissey
Head of Retirement Analysis

Helen raises awareness of key retirement issues to help people build their resilience as they move towards their later life.

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Article history
Published: 12th April 2023