Lifetime ISA vs Investment ISA

POSTED ON Wednesday, 12 August, 2020

Are you looking to put your hard-earned cash into an ISA with a long term saving view? Wondering whether you should choose an Investment ISA or a Lifetime ISA? We’ve broken down what you need to know to make your choice. 

What is a Lifetime ISA?

Lifetime ISAs were launched in 2017, and are a great opportunity for savers to get excellent returns on the money they put in – with some fairly strict boundaries.

The government will give an account holder a 25% bonus of the amount you put into the account each year. There is a limit imposed on how much you can put into the account per year, which currently stands at £4000 per year. This means you can stand to gain an attractive £1000 bonus every year.

Lifetime ISAs are intentionally designed to be long-term saving: account holders can only take money out at two different points.

Firstly, you can withdraw money from a LISA (Lifetime ISA) when you purchase your first home. This is designed to help first time buyers build up a deposit and get on the property ladder.

Secondly, you can withdraw money from a LISA after the age of 55, meaning that money you put into the account is earmarked for retirement age.

Withdrawals made at any other point could be subject to penalties, and will lose the 25% bonus from the government.

What is an Investment ISA?

An investment ISA (also known as a Stocks and Shares ISA) does what is says on the tin. It is an ISA account which allows you to invest money (up to a certain amount) without paying tax on the returns you gain each year.

The amount you can put into an investment ISA has no limit beyond the yearly amount stipulated by the government which covers all ISAs.

The tax allowance for the tax year 2020/2021 is £20,000, which can either be spread between different types of ISAs or – if you so choose – concentrated into one type of ISA.

In order to open an Investment ISA, you must be:

  1. 18 or over
  2. a citizen of the UK

You can choose to invest your money in various different funds depending on the platform you have chosen. Because of the excellent tax benefits, this is a very popular form of long-term saving.

Why would I choose a Lifetime ISA?

There are lots of reasons you could choose a lifetime ISA, including…

  1. If you’re saving for your first home, the 25% bonus from the government can be a huge help towards
  2. If you want to lock your money away in long-term savings, with a very large government bonus, to ensure you have a good-sized income when you retire, then having a LISA is one of the best ways you can make your money work for you.
  3. The 25% bonus from the government is the best possible return for your money, and is much higher than any interest rates you will get with an Investment ISA.
  4. Keeping your money in a long-term saving account in one place makes it easy to keep a track of.

Why would I choose an Investment ISA?

There are lots of reasons you could choose an Investment ISA, including…

  1. Lifetime ISAs lock your money away – if you’re looking for the truest long-term savings then that is the account for you. You will not be able to access the money before you are 55 without suffering penalties. However, with an Investment ISA, there are shorter terms available – you could gain good returns for locking your money away for only five years.
  2. You are only allowed one LISA per person, however you can have as many Investment ISAs as you wish (as long as you only open one Stocks and Shares ISA per year).
  3. If you are investment savvy, there is a vast amount of variety in the funds and shares you could invest in.

Do I have to choose between the two?

No – you are able to have and benefit from both types of account.

With a yearly allowance of £20,000 that you can put into a tax-free ISA wrapper, you can spread this across many different types of ISAs. However, the limitations that are placed within this are:

  1. You can only open one ISA of each type per year
  2. You can only put £4000 into a Lifetime ISA every year

Read more about Investment ISAs here.

Read more about Lifetime ISAs here.