Stocks and shares ISA vs Lifetime ISA

If you're considering saving or investing for the future, an ISA (Individual Savings Account) could be a great choice. However, not all ISAs have the same rules and benefits.

There are few different ISAs available but here we'll explain the difference between a stocks and shares ISA and a Lifetime ISA, so you can see if either is a good option for you.

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 treatment depends on your individual circumstances and may change in the future.

Any UK resident over the age of 18 can open a stocks and shares ISA.

Benefits of stocks and shares ISAs 

• Tax-efficient gains. You won’t have to pay UK income tax or capital gains tax on your returns. 
• Flexibility. You can choose from a variety of investment options to match the amount of risk you are willing to take.
• Potential for higher returns. They typically offer higher returns than cash ISAs over the long term, although this comes with higher risks.
• Accessibility. Funds can be withdrawn at any time without losing the tax benefits, so you have flexible access to your investment.

Key considerations for stocks and shares ISAs 

• The value of your investments can go down as well as up, so you might get back less than you invested.
• 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 over 18 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.

Bear in mind that the value of investments can fall as well as rise, so you could get back less than you've put in. And inflation may reduce the buying power of any cash in a savings account. 

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. 
• Withdrawing money from a Lifetime ISA for reasons other than buying your first home, you're age 60, or terminal illness means facing a 25% withdrawal charge. This withdrawal charge is calculated on the total withdrawal amount. 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 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. 

At Aviva we offer an Aviva Stocks & Shares ISA. You can choose from a range of investments choices, from a hands-on portfolio which you build yourself to ready-made funds.