Are you saving for your first home or planning retirement? ISAs or Individual Savings Accounts are a great way to grow your money in a tax-efficient way. With so many options out there, you might find yourself wondering, “Which ISA is right for me?” In this article we’ll explore two types of ISAs: the Lifetime ISA (LISA) and Stocks & Shares ISA. We’ll explain your ISA options, how each different account works, and who they work for so you can make a balanced decision.
An overview of the main types of ISAs
Cash ISA
This is the most common ISA offered by banks and societies. It is a safe place to keep your money without paying tax on the interest. This makes them ideal for short term savings like a new car. Fixed term cash ISAs often offer higher rates but might face a penalty charge on early withdrawals.
Stocks & Shares ISA
Unlike cash ISAs, your money has the chance to grow faster by investing in the stock market. You choose how your money is invested, from individual shares to ready-made funds. Furthermore, you won’t pay tax on any profits you make. It’s important to remember the value of your investments can go down, so you could get back less than you put in. Stocks & Shares ISAs are typically easy to withdraw from but are best suited for people happy to invest for at least 5 years.
What is a Lifetime ISA (LISA)?
The Lifetime ISA or ‘LISA’ is a special savings or investment account that can help you buy your first home or save for retirement with help from the government. It is also a good alternative to the discontinued Help to Buy ISA.
The Lifetime ISA is a little different as you can only open this account between ages 18 to 39. The government adds a 25% bonus on top of what you save until you turn 50. The money can be used to buy your first home, or withdrawn when you turn 60.
You can hold one Lifetime ISA that you can pay £4,000 into each tax year. You can open a cash LISA or a stocks and shares LISA where your money invested by the bank or provider. Deposits can be made into your chosen account type until you turn 50. After this, you won’t get your bonus or be able to make deposits, but you’ll still earn interest and returns on the balance.
You can only use the money to buy your first home or after you turn 60, unless you’re terminally ill with less than 12 months to live. Withdrawals for any other reason are subject to a penalty fee and you’ll lose your 25% government bonus.
If you die, the Lifetime ISA closes on your date of death and funds can be withdrawn without charge.
When can I use a Lifetime ISA to buy a house?
A GOV.UK report found in the 2023-2024 tax year, 56,900 people used their Lifetime ISA (LISA) to buy their first home. This stat shows that the LISA is becoming a popular way for first-time buyers to save for a deposit. The government bonus helps people reach their goal of homeownership faster.
Once your Lifetime ISA has been open for 12 months, you can use it to buy a property in the UK worth under £450,000 with a mortgage, unless you choose shared ownership.
Plus, first-time buyers don’t pay as much Stamp Duty Land Tax as other buyers.
Stamp Duty is due on residential properties over £250,000. However, first-time buyers don’t currently need to pay Stamp Duty on homes under £425,000 and enjoy a discounted rate on sales up to £625,000.
As you pay 0% on the first £425,000 of the property price, most LISA holders won’t need to pay Stamp Duty.
However, if the property costs more than £425,001, you’ll need to pay 5% on any amount over this. For example, if you buy a property for £440,000 with your LISA, you’ll pay 5% Stamp Duty on £15,000 (£4440 – £425,000), which totals £750.
Use the Money Helper Stamp Duty Calculator to find out more.
How much can I save with a Lifetime ISA?
Imagine you’re in your mid-20s and ready to buy your first home. You’re aiming to save the maximum amount of £4,000 a year, so put away £333.33 per month. This earns a government bonus of £83.33 on top, saving £416.66 per month. If returns are around 5% each year, you’ll have £28,142.65 after 5 years, which is enough for a 10% deposit on a £250,000 property.
If your plans change and you don’t buy a home, your Lifetime ISA keeps growing tax-free. By the time you reach 60, you could have a generous retirement pot.
What are Stocks and Shares ISAs?
A Stocks and Shares ISA, also known as an ‘investment ISA’, puts your money into companies with a view they’ll grow in value over time. It’s riskier than having a Cash ISA but could offer higher returns for long term saving.
There’s no age limit and can be opened by anyone in the UK who wants to invest their money. You can put up to £20,000 across your ISAs each tax year. Your money is invested in the stock market, which means it can either grow or go down in value.
Most popular Stocks & Shares ISA accounts let you take the money out anytime without a penalty. To be certain, check the provider’s terms before you open an account. Also, there’s a risk you might get back less than you put in.
How much can I save with a Stocks & Shares ISA?
Let’s say you invest £5,000 in a Stocks & Shares ISA, aiming for long-term growth to support early retirement. Over time, your investment could grow significantly, outpacing inflation to help your money keep its value. If your investments grow by an average of 5% each year then after a decade, your initial £5,000 could be worth over £8,000.
Of course, you might see your investment drop to £4,000 at one point, only to climb back up later. But a Stocks & Shares ISA gives you access your money without a penalty, which helps if your finances or situation changes.
More on the key benefits of each account
As we already mentioned, ISAs are an easy way to grow your money without paying extra tax. Any interest or profits you earn are tax-free and belong to you.
The benefits of a Lifetime ISA
The government gives you a 25% bonus. So, if you pay in £4,000 each year then you get an extra £1,000 on top. Available as both a cash or stocks and shares ISA, they offer steady and secure earning towards buying your first home in the UK.
If you don’t use your Lifetime ISA for a house, you can continue to grow your money tax-free in a Cash or Stocks & Shares Lifetime ISA until retirement. But remember, it’s not an ‘either or’ situation, you must choose one type.
The benefits of a Stocks and Shares ISA
If you’re comfortable with a level of risk and want to grow your money faster, consider a Stocks & Shares ISA. If your money is sitting in a regular savings account, inflation might mean it loses value over time. But if your Stocks & Shares ISA grows by 5% a year, and inflation is 3%, your money is increasing in value.
Investing your money in the stock market has potential for higher returns. ISAs hold tax-efficient status, meaning that there is no income tax or capital gains tax to pay. However, if the stock market falls, your investment could drop in value, so it’s important to be comfortable with risk.
Taxes: what you need to know
By now you’re probably aware of the tax benefits of ISAs, but the rules can differ between each type of account.
Any income and growth you get from Stocks and Shares ISAs are free from UK capital gains tax and income tax, which helps your investments grow.
The Lifetime ISA is also free from income tax and capital gains tax, but comes with a 25% bonus, which is essentially free money from the government.
If you withdraw money from your Lifetime ISA before age 60 but don’t use the money to buy your first home, you’ll pay a 25% withdrawal charge. You can take money out of a Stocks & Shares ISAs anytime without penalties, but your investments may go down depending on the market.
Therefore, Lifetime ISAs are great for long-term savings that you shouldn’t withdraw from unless it’s for very specific purposes. On the other hand, a regular Stocks & Shares ISA is a more flexible option.
Try to use your full allowance within the tax year and review your ISA regularly to make sure you’re getting the best rates and returns.
The main differences between Lifetime and Stocks & Shares ISAs
Decoding account terms and researching providers means that choosing an ISA account can be tough. This table compares some of the key differences between Lifetime or Stocks and Shares ISAs to help you decide which one works best.
| Lifetime ISA | Stocks & Shares ISA | |
|---|---|---|
| Purpose | Buying your first home or retirement after age 60. | General savings and investments. |
| Investment type | Choose between cash or stocks and shares. | Stocks and shares. |
| Yearly contribution limit | £4,000 which counts towards your £20,000 annual ISA allowance. | £20,000, which can be used as or alongside a Lifetime ISA. |
| Government bonus | 25% bonus on contributions (up to £1,000 per year) until you turn 50. | No government bonus unless you have a Lifetime ISA using stocks and shares. |
| Age limit | Must open between 18-39 years old and make the first deposit before turning 40. Deposits can be made until your 50th birthday. | Must be 18+ to open an account but no age limits on deposits or withdrawals. |
| Withdrawal rules | Penalty-free for first home purchase or after age 60. | No government penalty. |
| Risk and return | Lower risk on cash ISA and steady growth with a government bonus. Returns lower if withdrawals are made outside of the account terms. | Stocks and shares ISA aims for higher returns but are tied to the stock market, so there is potential for loss. You can also open a Stocks & Shares Lifetime ISA. |
Which ISA account is right for me?
Choosing the right savings account depends on your personal circumstances, goals, and how much risk you’re comfortable with.
Investing in the stock market comes with risk and you might get back less than you started with. If you’re still not sure which ISA account is best for you, speak to a financial adviser. They can help you figure out what works best for your finances and personal needs.
Can’t decide if a lifetime or stocks and shares ISA is better? The good news is you can have both. This means you could pay £4,000 into a LISA account and use the rest of your £20,000 allowance to growing savings in a stocks and shares ISA.
How Shepherds Friendly can help you
Want to see your savings work harder? Our Stocks & Shares ISA could earn you a bonus every three months with less tax to pay. Join 1,000s of happy investors and start growing your money today. Plus, get up to £100 cashback when you open your ISA.
Find out more about growing your money on the Shepherds Friendly blog.
