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Financial Education Online

ISAs and LISAs

An ISA is a type of savings account that can be used to store either cash or investments in a tax-efficient way.

Returns received from cash or investments held in an ISA are paid free of any UK tax.

ISAs have become more flexible over recent years, offering the option to switch holdings within an ISA between cash and investments and to have a mixture of the two.  The maximum an individual can pay in total into ISAs each tax year is £20,000. You can normally withdraw money from an ISA at any point, unless you have a fixed term interest product where you have locked away your money in return for a specific interest rate.

  • Stocks and shares ISAs invest your money in stocks or shares, which mean that your savings value could go up or down, if your investment value fluctuates. In the worst case, you could lose all of your money. These should be viewed as a long term savings vehicles and you should plan to invest for at least 5 years in order to see growth.

  • Another type of ISA is a cash ISA. This ISA is simpler and gives you a set interest rate for investing your money. Like savings accounts you can either lock away your money for a longer time or have an easy access ISA, normally with a lower interest rate. Your money is safer inside a cash ISA when compared to a stocks and shares ISA but potential growth may not be as high and current rates are below inflation.

Lifetime ISA (LISA)

Since 2017, the government has offered a new sort of product known as a Lifetime ISA or LISA. The main purpose of this product is to help people save toward retirement or their first home.

This is structured the same as other ISAs, being available as either stocks and shares or cash and still shelters your savings growth from tax.

There are a few key differences to the LISA when compared to a standard ISA:

  • Only people aged between 18-40 can open a LISA

  • An individual can only put £4,000 per year into an LISA

  • The government will add a 25% bonus to any contributions until you’re 50

  • The LISA can only be withdrawn for a deposit on a first home or after age 60

It’s important to note that the £4,000 limit, is included in your £20,000 annual ISA allowance. So, if you contributed £4,000 to a LISA, you could only contribute a maximum of £16,000 to other ISAs that year.

There is also a clause which allows you to withdraw your money for other reasons than to buy a first home before age 60 but this would come with a 25% charge on the total value of your investments. It is therefore likely that you will lose out. The only time this penalty wouldn’t apply is if you were terminally ill or had passed away.

In this section

Principles

Risk and return

pensions

ISAs and LISAs