A lifetime ISA can only be opened up if you are between the ages of 18 and 39. It is a vehicle you can use to either buy your first home or put money towards your retirement. If you put money into the lifetime ISA and then want to withdraw money from it later down the line for anything other than those two reasons YOU WILL BE CHARGED 25% (which is equivalent to a loss of just over 6% as will be discussed later) of the value of the withdrawal. If you think there is a chance any money you put into a lifetime ISA you may need for reasons other than with the ISA was intended for then I would strongly recommend you consider whether it is the best place for your money. 

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Now that's out of the way with, if you know that the money you put in you will definitely be for either buying your first home or putting money towards your retirement then this is an excellent place to put your money. The reason for this is that the Government will top up your lifetime ISA contributions by 25% up to a maximum of £1,000. Essentially the most you would ever want to contribute on one tax year would be £4,000 and the Government will add £1,000 on top. 

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You can hold contribute to a stocks and shares ISA and a lifetime ISA in the same tax year. As an example, you could contribute £16,000 to your stocks and shares ISA and £4,000 to your lifetime ISA. Remember your total ISA allowance is currently £20,000 a year. 

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The reason why the loss is equivalent to just over 6% if you were to withdraw the money for reasons other than buying your first home or for your retirement can be seen below. 

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January 2022

Add to Lifetime ISA: £4,000

Government top up: £1,000

Account: £5,000

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March 2022

Withdraw from Lifetime ISA: £5,000

Penalty charge 25%: £1,250

Left over: £3,750 

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The net loss in this example is £250 (£4,000 - £3,750) which is a loss of 6.25% (£250/£4,000). This is why it is crucial that the money in the lifetime ISA is used for its intended purpose! 

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There are two types of lifetime ISAs. You can have either a cash lifetime ISA or a stocks and shares lifetime ISA. If you are planning on buying your first home and will likely buy within the next 5 years then a cash lifetime ISA would likely be the best option due to the short term volatility of the stock market. It is worth noting that if you want to buy a house with the lifetime ISA you will not be able to do so until a year has passed since the opening of your the account. 

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If you are planning on buying a house with the lifetime ISA but know that it will be in more than 5 years time or if you are using the ISA for your retirement savings, then a stocks and shares ISA would be the best option. This is due to the superior long term returns that the stock market offers which is covered in my Stock Market Series.