Lifetime ISA vs Stocks and Shares ISA

Choosing the right ISA can make a big difference to your long-term savings. Two popular options are the Lifetime ISA and the Stocks and Shares ISA. Both are tax-efficient, but they serve different purposes and come with different rules, benefits, and risks.

• Lifetime ISAs are designed for first-time home buyers, and offer a 25% government bonus, up to a maximum of £1,000 per tax year.
• Stocks and Shares ISAs are savings accounts that invests your funds in the stock market; there is no government bonus but there is the potential for higher returns over time compared to a standard ISA (capital at risk).

In this guide, we’ll break down the differences between these two ISAs to help you compare their features.

What is a Lifetime ISA?

A Lifetime ISA* is a tax-free savings account designed to help you save for your first home or later life. If you’re aged 18 to 39, you can open a LISA and contribute up to £4,000 per tax year, which counts toward your overall ISA allowance.

One of the key benefits of a LISA is the government bonus. The government adds 25% to your contributions, up to £1,000 per tax year, helping your savings grow faster. 

Benefits of a Lifetime ISA (LISA)

A Lifetime ISA can be a useful option for long-term savings, whether for purchasing your first home or planning for later life.

Government bonus

The government adds 25% to your contributions, up to £1,000 per tax year. This bonus helps your savings grow faster than a standard ISA.

Helps first-time buyers

You can use your Lifetime ISA to buy your first home worth up to £450,000 without paying a withdrawal penalty, provided it has been at least 12 months since your first contribution and the property is purchased with a mortgage as your main residence (terms and conditions apply).

Encourages long-term saving

If you don’t use your Lifetime ISA for a first-time home, your money will remain in the account until age 60, providing a tax-efficient way to save for later life. You can make contributions until age 50, and your funds will continue to earn interest or investment growth until you can withdraw them at 60.

Can be used alongside other ISAs

Contributions to a Lifetime ISA (LISA) count towards your overall £20,000 ISA allowance, with a maximum of £4,000 per tax year. This means you have £16,000 you can use on a Cash ISA** or a Stocks and Shares ISA to maximise the tax-free benefits. 

**The Cash ISA allowance drops to £12,000 in April 2027 for under 65s.

Things to consider when choosing a Lifetime ISA

Whilst a Lifetime ISA (LISA) can be a powerful way to save, it’s important to understand its rules and limitations before opening an account. Here are some factors to consider:

Age restrictions

You must be aged 18–39 to open a LISA. You can contribute until age 50, after which you can no longer add money to the account. Bonuses will not be paid after reaching 50, but interest or gains will continue to accrue on the funds, up until it is withdrawn after you turn 60.

Contribution limits

You can only contribute up to £4,000 per tax year, which counts towards your overall £20,000 annual ISA allowance.

Withdrawal rules and penalties

Funds can be withdrawn without penalty for buying your first home (up to £450,000) or after reaching the age of 60. Early withdrawals for any other purposes incur a 25% government withdrawal charge, which means you'll get back less than you initially contributed.

Considerations for your goals

A LISA may suit you if your goal is to buy your first home or save for later life. If you may need access to your money for other purposes, a LISA may not be the best choice.

What is a Stocks and Shares ISA?

A Stocks and Shares ISA* is a type of Individual Savings Account that allows you to invest your money in the stock market while keeping any gains tax-free. Unlike a Cash ISA, where your savings earn interest at a fixed or variable rate, a Stocks and Shares ISA invests your money into a mix of investments such as shares, bonds, funds, and other assets, giving your savings the potential to grow more over time.

Because your funds are invested in the stock market, the value of a Stocks and Shares ISA may go up and down. This means there’s a possibility you could get back less than you originally invested. 

For this reason, these ISAs are generally suited to people who plan to invest for the long term, are comfortable with market fluctuations, and are willing to accept some risk in exchange for the potential of higher returns.

Benefits of a Stocks and Shares ISA

A Stocks and Shares ISA can be an effective way to grow your savings while maximising the tax benefits of ISAs. Here’s why many people choose them:

Tax-free growth

Any returns on your investments are completely free from income tax and capital gains tax, whether from:

• Dividends – payments made by a company to its shareholders from its profits
• Capital growth – increases in the market value of your investments over time

Long-term growth potential

Investments in Stocks and Shares ISAs can grow steadily in line with the performance of the funds your account is invested in. While there’s no guarantee of returns, keeping your money invested for the long term allows you to try and wait out fluctuations in the market.

Beginner-friendly investing

Even if you’re new to investing, a Stocks and Shares ISA allows you to start small and learn as you go. Many providers offer managed portfolios to simplify the process and guide your investment decisions.

Full use of your ISA allowance

With a Stocks and Shares ISA, you can contribute up to your full £20,000 annual ISA allowance each tax year (subject to not making contributions to any other ISAs). There’s also no upper age limit, so you can continue contributing later in life as well.

Things to consider when choosing a Stocks and Shares ISA

A Stocks and Shares ISA can be a great way to grow your money, but it’s important to understand the potential risks before investing. Here are some factors to keep in mind:

Value may fluctuate

The value of your investments is linked to the stock market and the financial markets (fund performance), so your ISA could increase or decrease in value. This means it’s possible to get back less than you originally invested.

Fees

Platform fees, fund management fees, and trading costs may reduce overall returns. It’s important to understand the charges associated with your Stocks and Shares ISA before you start investing.

Considerations for your personal situation

Consider your own financial needs and risk tolerance. If you might need regular access to your money or feel uncomfortable with market fluctuations, a Stocks and Shares ISA may not be the best fit.

What is the difference between a Lifetime ISA and a Stocks and Shares ISA?

While both Lifetime ISAs and Stocks and Shares ISAs are tax-efficient savings accounts, they serve different purposes. Understanding these differences can help you decide which account, or combination of accounts, best suits your financial goals. 

Below is a detailed comparison of the key features of a Lifetime ISA versus a Stocks and Shares ISA:

*Terms and conditions may vary between providers and products.

How your money could grow

The potential growth of your savings depends on the type of ISA you choose. Both Lifetime ISAs and Stocks and Shares ISAs offer opportunities for your money to grow, but in different ways - for example:

Lifetime ISA:

• Contributing £333.33 each month over the tax year*
• Government adds 25% each contribution = £83.33 per month
• Total contributions per tax year with government bonus = £4,999.92
• Over 10 years = £49,999.20
• With a 4%** interest rate = £61,373.99

*Calculated using a compound interest calculator, based on £416.66 monthly deposits at the end of each month for 10 years to account for government bonus and person contributions. Interest compound frequency daily with 4% annual interest.

**As per the interest for Unity Mutual’s Lifetime ISA. Interest rates may vary from provider to provider.

Stocks and Shares ISA:

• Invest £3,996 per tax year in a Stocks and Shares ISA with an average 2%* (low) annual growth for 10 years = £42,000
• Invest £3,996 per tax year in a Stocks and Shares ISA with an average 5%* (medium) annual growth for 10 years = £48,900
• Invest £3,996 per tax year in a Stocks and Shares ISA with an average 8%* (high) annual growth for 10 years = £57,000

*Growth isn't guaranteed, it may vary with the financial market, and can be higher or lower than these figures.

Combined approach:

• £4,000 per tax year into a LISA to get the bonus to use towards your first home or later life.
• Remaining £16,000 per tax year into a Stocks and Shares ISA for long-term growth.

When to choose a Lifetime ISA

A Lifetime ISA* may be suitable if you have the specific long-term goal of buying your first home or saving for later life. You may want to consider a LISA if:

• You’re a first-time buyer saving for a property under £450,000
• You’re saving for later life and won’t need access until at least age 60
• You’re aged 18–39, so you can open a LISA and benefit from the government bonus
• You’re comfortable with restricted withdrawals and the 25% penalty for non-qualifying withdrawals

Find out more about the Unity Mutual Lifetime ISA.

When to choose a Stocks and Shares ISA

A Stocks and Shares ISA (capital at risk) may be better suited for long-term investing without government restrictions on withdrawals. Consider it if:

• You might need access to your money at any time without penalties
• You want to invest more than £4,000 per tax year and take full advantage of the full £20,000 annual ISA allowance
• You are investing for medium or long-term goals
• You are comfortable with market risk
• You are saving for a property and aren’t a first-time buyer or are saving for a property over £450,000

Find out more about the Unity Mutual Stocks and Shares Flexible ISA.

Using a LISA and Stocks and Shares ISA together

It’s possible to hold both a Lifetime ISA and a Stocks and Shares ISA at the same time, as long as your total contributions stay within the £20,000 ISA allowance per tax year.

Each account can be used for different purposes, depending on your goals.

How to combine:

1. Maximise your LISA contributions: £4,000 per tax year to receive the full £1,000 government bonus.

2. Use the remaining ISA allowance: Put £16,000 per tax year into a Stocks and Shares ISA. 

3. Plan according to your goals: You could use the Lifetime ISA for first-home savings, and the Stocks and Shares ISA for medium to long-term investments.

Comparing ISA Options

Choosing the right ISA comes down to your personal goals. If you’re saving for a first home or looking to set money aside until age 60, a Lifetime ISA may be a suitable option thanks to the 25% government bonus. 

While a Stocks and Shares ISA doesn’t offer a government bonus, it allows you to invest up to the full £20,000 annual ISA allowance and benefit from tax-free investment growth over the long term.

For many people, an effective approach can be to use both. Contributing £4,000 a year to a Lifetime ISA to get the government bonus, and investing the remainder of the allowance in a Stocks and Shares ISA. 

If you’re unsure, speaking to a regulated financial adviser (such as unbiased.co.uk) can help you make more confident decisions.

You can also talk to our friendly team by calling us on 0161 214 4650. While we can’t advise on whether a particular ISA is right for you, we’re happy to provide clear, factual information and explain how our products work.

*Terms and conditions apply to all our products