Stocks & Shares ISA

Lifetime ISA vs Stocks & Shares ISA

What is the best account for you? And how can you best invest your money tax-efficiently?

Important information - investment value can go up or down and you could get back less than you invest. If you're in any doubt about the suitability of a Stocks & Shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.

Lifetime ISAs (LISA) and Stocks & Shares ISAs both come from the ISA family of savings accounts. Both come with protections from Capital Gains and Income Tax, but not all ISAs are made equal.

So, LISA or Stocks & Shares ISA? Choosing between them doesn’t need to be difficult, and you might not need to choose at all. This isn’t personal advice though; you should always seek guidance from a financial professional if you’re unsure what’s right for you and your circumstances.

What is a Stocks & Shares ISA?

A Stocks & Shares ISA is a tax-efficient savings account which you can top up by £20,000 each year.

It gives you the freedom to choose how your money is invested, with unlimited potential on the returns you could make, avoiding Capital Gains and Income Tax.

Benefits of a Stocks & Shares ISA

All ISAs provide the same tax benefits. This means you won’t need to pay Capital Gains or Income Tax on any of the returns you make from your ISA savings. But there are things that make each unique.

There are many benefits of a Stocks & Shares ISA, which is why it’s such a popular choice for tax-efficient investing.

Contributing

With a Stocks & Shares ISA, the choice is yours. You can contribute however much you want up to your full £20,000 annual allowance, per tax year. There’s no age limit that will stop you contributing to your Stocks & Shares ISA in later life either.

Other types of ISA also use some of your annual allowance but can’t receive it in full. For example, you can only contribute £4,000 into Lifetime ISA each year and only until your aged 50, while a Help to Buy ISA only allows you to contribute £200 a month.

Learn more about ISA allowances.

Accessing your cash

You can access your cash at any time with a Stocks & Shares ISA.

There are no penalties if you choose to take some of your savings, unlike with a Lifetime ISA that may carry an HMRC charge.

You just need to bear in mind that your investments could lose value. So you’ll need to make sure you’ve made enough cash available for the amount you want to withdraw.

Making a return

The returns you make in a Stocks and Shares ISA depends on what you choose to invest in. Their underlying value can change as they perform in the market, so they could be worth more, or less than their initial cost.

If their value increases above what you paid, the return you’ve made is protected from Capital Gains Tax.

Your investments could also issue dividends or cash distributions, and these are also protected from Income Tax.

At ii, we also pay interest on your cash balances - which is also protected - giving you ways to grow your savings with cash you’ve not yet invested.

Find out more about our ISA interest rates.

Managing your Stocks & Shares ISA

If you hold accounts with us already, you can open a Stocks & Shares ISA on a platform you already know how to use - at no additional cost.

Diversifying your cash into different account types spreads risk and provides more options for growing your savings. Having accounts with multiple providers makes it much harder to keep track of your money. So why not keep it all in one place?

With our flat fee pricing, you know exactly what you pay as you grow your wealth and keep track of it alongside your Trading Account or SIPP (Self Invested Personal Pension). Unlike most other investment platforms who charge a percentage of your assets, resulting in much higher fees

Learn more about transferring an ISA.

Things to consider when choosing a Stocks & Shares ISA

A Stocks & Share ISA, whilst being a great way to grow your savings, isn’t the right account for everyone and there are some things to be aware of.

Returns aren’t guaranteed

Stock markets aren’t risk-free, and the returns you make are heavily dependent on how the investments you choose to invest in perform. This means that you might get back less than you put into your ISA if they don’t perform as you’d hope.

Researching and keeping on top of your investments is a great way to reduce this risk. It’s something any investor needs to be aware of – no matter if they invest using an ISA or not.

No government bonus

There aren’t any government bonuses with a Stocks & Shares ISA, you only get these with a Lifetime ISA or Help to Buy ISA. This is something to consider if you’re not planning to use your full allowance for the year and don’t have as much time to keep track of investments.

For example, if you’re only planning to use £4,000 of you ISA allowance this year and won’t need instant access to your cash, a Stocks & Shares ISA will only provide you with the returns on your investments – and any interest your provider might pay.

Whereas a Lifetime ISA allows you to put your £4,000 into the same investments, but you’ll also benefit from a 25% government bonus which can boost your savings.

Lost allowances

If you don’t yet have a Stocks & Shares ISA it’s not too late, but it is too late to make the most of any previous tax years allowances you’ve not used. Your ISA allowance doesn’t roll over if you don’t use it, you get a fresh allowance once each tax year begins.

What is a Lifetime ISA?

A Lifetime ISA (LISA) is another tax-efficient account that lets you use up to £4,000 of your annual allowance. If you’re aged 18 to 39 you can open a LISA and make long term savings, for your first home or retirement.

It gives you the freedom to invest or make cash returns, but the government will also boost your savings by 25% (up to a maximum bonus of £1,000 each year).

You won't have instant access to your cash until you’re 60 or buying your first house, without incurring a HMRC penalty.

Find out more about a Lifetime ISA

Benefits of a LISA

Lifetime ISAs come with the same tax-efficiencies as other ISAs, meaning your savings and returns are protected from Capital Gains and Income Tax.

Government bonus

The main draw of the Lifetime ISA is a 25% bonus the government will add to your savings.

The bonus is paid monthly on contributions you make to your LISA during the claim period – 6th day of the month to the 5th day of the next calendar month – up to a maximum bonus of £1,000 in each tax year.

There isn’t a limit on how much you can contribute each month, provided you don’t contribute more than £4,000 to your LISA each tax year, or go over your annual ISA allowance across all your ISAs.

For example, you could contribute your full £4,000 allowance in a month on 10th January – or any point between 6th January to 5th February. You would receive a £1,000 bonus – the maximum given for the tax year. As you’ve used up your allowance, you wouldn’t be able to make any further contributions or receive any further bonuses until the new tax year. You can also split your contributions throughout the tax year.

Bonuses will be paid on any contributions until you turn 50, but only if you made your first LISA contribution before you turned 40.

Cash, Investments, or both

As well as the government bonus, a Lifetime ISA can be used to earn interest on cash held in the account, or to invest in stocks and shares.

This means just like a Stocks and Shares ISA you have the benefit of being able to choose how you grow your savings.

Things to consider when choosing a LISA

A Lifetime ISA is designed for people looking to save for the long term, for a house purchase or later life.

It might not be the best way to save if you expect to need access to your cash in the short term, or you want to save more each year than your £4,000 Lifetime ISA allowance.

Accessing your savings

If you’re not over the age of 60, and you’re not using your cash to buy your first home, accessing your savings comes at a cost. Stocks and Shares ISAs allow you access to your savings anytime without penalty, whereas a LISA incurs a charge.

You can still access your savings, but there is a government withdrawal charge, currently 25% of the amount you want to withdraw. This means that you could end up getting less back than you’ve put in, and charged more than the bonus you receive.

For example, you’ve contributed £2,000 to your Lifetime ISA, and you’ve received a 25% bonus of £500. If you’re not 60, and you’re not making your first house purchase, to make a full withdrawal you will be charged £625, 25% of the full amount. This is more than the bonus you received so you will only be taking out £1,875 which is £125 less than you put in.

The only exception to this penalty is if you’re terminally ill and have less than 12 months to live, you can apply to take your cash out without charge.

Allowance

You have an annual allowance - currently £20,000 - to put into ISAs, but not all of it can be used toward a Lifetime ISA.

You can only contribute up to £4,000 of this each tax year. This is different to a Stocks and Shares ISA which lets you put in your full allowance.

Contributing

You can only open and make your first contribution to a Lifetime ISA if you’re under 40, and you can only keep contributing and benefiting from the government bonus until you’re 50.

This means the longer you wait to open a Lifetime ISA, your potential to maximise the benefits becomes less.

For example, if you open your Lifetime ISA aged 39. You will need to make your first contribution that year and you will only be able to contribute for the next 10 years. You can’t contribute once you’ve reached 50.

If you use your full £4,000 Lifetime allowance each year, you will only have contributed £44,000 unless you’ve used the rest of your overall ISA allowance in other ISA types.

Managing your accounts

With only being able to contribute £4,000 each year, you can’t make use of your remaining £16,000 ISA without also having another type of ISA.

Having multiple ISAs can be a great way to diversify how you grow your savings. But it can also make it more difficult to keep track of your savings if you have accounts spread across multiple providers.

Save with Cash or Invest with a LISA

A Lifetime ISA will likely receive interest on top of the 25% monthly government bonus, but it can also be used to invest in stocks and shares. This can boost the potential for you to grow your LISA and get bigger returns than if you weren’t to invest – just like a Stocks and Shares ISA.

For example, you could contribute £4,000 in a tax year, and use half to invest in stocks or shares, but keep the other half as cash to generate interest payments from your provider. You will still receive the 25% government bonus on your contributions no matter how you choose to use them.

Which is right for you, a LISA or Stocks & Shares ISA?

A LISA is limited to only allowing you to contribute £4,000 while a Stocks & Shares ISA can use your full £20,000 annual allowance.

If you plan to put more focus on investing but want the flexibility to make withdrawals without penalty, Stocks & Shares ISAs can offer you the opportunity for bigger rewards and the freedom to enjoy them. Whereas a Lifetime ISA and the bonus it receives can give you more consistent returns and more diversity, lowering risk.

Stocks & Shares ISA vs LISA Comparison

	Lifetime ISA	Stocks & Shares ISA
Contributing	£4,000 of your annual allowance. You can only contribute until you're 50, and your first contribution must be before you're 40.	Full £20,000 annual allowance.
Investing	Yes	Yes
Interest	Yes, depends on the provider you choose.	Not always, but at ii we pay interest on your cash balances, accrued daily.
Bonus	25% government bonus paid monthly, until you're 50 (Maximum: £1,000 per year).	No government bonus.
Withdrawing	25% LISA value penalty if under aged 60. Penalty-free access once aged 60, for your first house purchase or if you're terminally ill.	Instant, penalty-free access to your ISA balance.
Fees	Your LISA provider may apply charges to supply your account.	You can open an ii Stocks and Shares ISA at no additional cost if you already hold an account with us.

Can I have a LISA and a Stocks & Shares ISA?

Yes! You can have both a Lifetime ISA and Stocks & Shares ISA.

As you can only put up to £4,000 of your annual allowance into a Lifetime ISA, having another type of ISA alongside it is the only way you will be able to fully use the full £20,000 ISA allowance.

Depending on what you’re saving for and how quickly you might need to cash in on any returns will help you decide which ISA type, or which combination of ISAs, are best for helping you reach your savings goals.

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