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Lifetime ISA vs stocks and shares ISA

Written by Ines Pena

Choosing the right type of ISA for you is one of the most important decisions you can make with your money.

A lifetime ISA is great for saving for your first home, but an ISA can give you more flexibility. How can you decide which is right for you?

What is a lifetime ISA?

A lifetime ISA is a tax-free savings or investment account designed to help young people buy their first home or put money away for life after 60.

The biggest benefit of lifetime ISAs is the 25% government bonus you get on everything you save or invest. You can put up to £4,000 into a lifetime ISA each tax year, so that 25% bonus can add up to as much as £1,000 each tax year.

The caveat to getting free money from the government is a restriction on what you can use your lifetime ISA for.

Before you turn 60, you can only use the money in your lifetime ISA to buy your first home. This home must cost no more than £450,000. If you take money out of a lifetime ISA for any other reason before age 60, you’ll pay a 25% government penalty fee on your entire withdrawal. This fee adds up to more than the bonus you received, meaning you can lose the bonus as well as some of the money you put in.

It’s also worth noting that the £4,000 annual allowance on the lifetime ISA is part of your £20,000 annual ISA allowance. So if you max out your lifetime ISA you’ll only be able to put £16,000 into your ISA that tax year.

Lifetime ISAs are available as either cash or stocks and shares accounts. Our OneFamily Lifetime ISA invests in stocks and shares.

What is a stocks and shares ISA?

A stocks and shares ISA is a tax-free investment account, meaning you won’t pay any tax on the money you take out, no matter how much it grows by.

Your annual ISA allowance is £20,000. This is how much you can pay in each tax year. There’s no limit to how many ISAs you can have, but your allowance is shared across all of them, including a lifetime ISA, if you have one.

There are no restrictions on why and when you can withdraw your money, but different providers might have their own rules.

There are cash ISAs and stocks and shares ISAs available, and you can have both. At OneFamily, we only offer stocks and shares ISAs.

What are the similarities between lifetime ISAs and stocks and shares ISAs?

As they’re both ISAs, they share a few common traits.

Both are tax-free accounts, meaning you won’t pay tax on the money you take out, regardless of growth.
They share your annual ISA allowance. Lifetime ISAs have their own allowance of £4,000, but any money you pay in also counts towards your overall £20,000 allowance.
Both ISAs and lifetime ISAs can be opened from age 18. If you have a child trust fund or a junior ISA with OneFamily, you can choose to reinvest in both or either type of ISA when your account matures.

What are the differences between lifetime ISAs and stocks and shares ISAs?

Despite their similarities, it’s important to keep in mind that lifetime ISAs and stocks and shares ISAs are very different products, and one will be more suited to you than the other.

At what age can you open one?
Lifetime ISA Between the ages of 18 and 39 (inclusive).	Stocks and shares ISA At any age, from age 18.

How long can you pay in for?
Lifetime ISA Until age 50. You’ll get the government bonus on everything you pay in until this time.	Stocks and shares ISA There’s no age limit on how long you can pay into an ISA.

Is there a government bonus?
Lifetime ISA Yes, there’s a 25% government bonus on everything you put in. You can get up to £1,000 each tax year from your government bonus.	Stocks and shares ISA No.

When can you withdraw the money and what can you use it for?
Lifetime ISA You can use your lifetime ISA to buy your first home or to put money away for life after 60. You’ll pay a 25% government penalty fee if: you use your lifetime ISA to buy your first home within the first 12 months of the account being open, or you use the money for anything other than buying your first home, before you turn 60.	Stocks and shares ISA You can withdraw from an ISA any time, and you can use the money for anything you want. Different ISA providers might have individual withdrawal conditions.

When can you withdraw the money and what can you use it for?

Lifetime ISA
You can use your lifetime ISA to buy your first home or to put money away for life after 60. You’ll pay a 25% government penalty fee if:

you use your lifetime ISA to buy your first home within the first 12 months of the account being open, or
you use the money for anything other than buying your first home, before you turn 60.

Stocks and shares ISA
You can withdraw from an ISA any time, and you can use the money for anything you want. Different ISA providers might have individual withdrawal conditions.

How much can you put in?
Lifetime ISA Up to £4,000 each tax year, as a part of your £20,000 annual ISA allowance..	Stocks and shares ISA Up to £20,000 each tax year, split between all of your ISAs.

	Lifetime ISA	Stocks and shares ISA
At what age can you open one?	Between the ages of 18 and 39 (inclusive).	At any age, from age 18.
How long can you pay in for?	Until age 50. You'll get the government bonus on everything you pay in until this time.	There's no age limit on how long you can pay into an ISA.
Is there a government bonus?	Yes, there’s a 25% government bonus on everything you put in. You can get up to £1,000 each tax year from your government.	No.
When can you withdraw the money and what can you use it for?	You can use your lifetime ISA to buy your first home or to put money away for life after 60. You’ll pay a 25% government penalty fee if: you use your lifetime ISA to buy your first home within the first 12 months of the account being open, or you use the money for anything other than buying your first home, before you turn 60.	You can withdraw from an ISA any time, and you can use the money for anything you want. Different ISA providers might have individual withdrawal conditions.
How much can you put in?	Up to £4,000 each tax year, as a part of your £20,000 annual ISA allowance.	Up to £20,000 each tax year, split between all of your ISAs.

Which type of ISA is right for me?

Ultimately, the right ISA for you will depend on what your financial goals are, but it’s good to keep in mind that you can have a lifetime ISA and other ISAs open at the same time.

You want to buy your first home or save for life after 60

If you’re serious about becoming a homeowner one day, lifetime ISAs are some of the best tools at your disposal. With a 25% government bonus of up to £1,000 each tax year, you’ll be on the fast-track to having those keys in your hand.

Once you’ve become a homeowner, you can keep paying into it until age 50 and put that government bonus towards anything you’d like when you retire.

Check out our Lifetime ISA

You want to save for anything else or you’re not sure what you want yet

With a roomy annual allowance of £20,000 and no limit on how many accounts you can have open, a stocks and shares ISA can be a great product for both the undecided and those with lots of different goals.

And if you choose to save for a first home later, you can transfer up to £4,000 of the money in your stocks and shares ISA into your new lifetime ISA.

Check out our Stocks and Shares ISA

Both our stocks and shares ISA and our lifetime ISA invest in stocks and shares. This means your money has good potential to grow in the future, but the value of your investments could go down as well as up and you could get back less than you’ve paid in.