Stocks and shares ISA and Lifetime ISA

A stocks and shares ISA is a type of savings account that allows you to choose from a range of investments, such as stocks and shares, bonds, and investment funds. 

Please note that the value of your investments can go down as well as up, so you could get back less than you invest. Tax rules can change and any benefits will depend on personal circumstances.

Any UK resident aged 18 or over can open a stocks and shares ISA.

Benefits of stocks and shares ISAs 

• Potential tax efficient gains. You won’t have to pay UK income tax or capital gains tax on any returns. 
• Flexibility. You can choose from a variety of investment options to match the amount of risk you are willing to take.
• They are designed for long term investing but should you need access, you are able to withdraw money at any time. This usually means that you will lose that portion of  the ISA allowance for that tax year unless the stocks and shares ISA you invested in is a flexible stocks and shares ISA.
• £20,000 annual allowance. You can invest the full ISA allowance over the tax year.

Key considerations for stocks and shares ISAs 

• There may be fees associated with buying, managing, and selling investments. Provider charges can include account management fees, transaction fees and fund manager charges. These fees vary by provider and investment type.
• Your annual allowance for ISAs from all providers this tax year is £20,000, and that’s the combined total across any types of ISA you have.

A Lifetime ISA (LISA) is designed to help you save for your first home or your retirement. If you're a UK resident who is 18 or over and under 40, you can open a LISA and contribute up to £4,000 each tax year – but you can only make contributions until the age of 50. The government adds a 25% bonus on top of your contributions each year, up to a maximum of £1,000 per year. 

With a LISA you can choose to save in cash if you're looking for a safer option or choose stocks and shares if you're happier investing for the long term and are comfortable with more risk.

Investing offers the potential for better returns than cash savings over the long term (5 years+), but there are risks. The value of your investment may go down as well as up and you may get back less than you paid in. 

Bear in mind that if you save in cash, inflation can reduce the buying power of your money.

Benefits of Lifetime ISAs

• Government bonus. A 25% bonus from the government on contributions, up to a maximum bonus of £1,000 per year.
• Tax-efficient growth. Like stocks and shares ISAs, any growth or interest is free of UK income tax and capital gains tax.
• They can be put towards buying your first home.
• Savings for retirement. When you turn 60 you can make full or partial withdrawals.

Key considerations for Lifetime ISAs 

• They’re only available to people aged 18 to 40.
• You can only contribute until the age of 50, and there's a cap of £4,000 a year. This lower allowance of £4,000 still counts towards your £20,000 annual allowance total for the tax year.
• You can only put up to £450,000 of a LISA towards buying your first home. 
• You can only generally withdraw money for a first house purchase or at age 60 without penalty - outside of this there is a 25% withdrawal charge which is calculated on the total amount taken out. The 25% withdrawal charge also applies to transfer of a Lifetime ISA to another type of ISA before age 60. As a result, you could lose more than just the bonus, cutting into your original investment as well.

There are a few things to consider when choosing between a stocks and shares ISA and a Lifetime ISA. These include your financial goals and the amount of risk you’re willing to take with your savings. Depending on your age, you also might not qualify for a LISA.

However, an important thing to consider is what you plan to use the savings for. If you’re saving for your first home and meet the age requirement, a LISA may be the best option for you. Otherwise, you might want to opt for a stocks and shares ISA or a different ISA product altogether, such as a cash ISA. If you’re unsure which one best suits your needs, you should speak to a financial adviser.