Updated: February 12, 2020

Cash vs Stocks and Shares Lifetime ISAs

Wondering whether to choose a LISA or a cash ISA? Read through our guide to find out how they compare and contrast.

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Richard Angliss

Author: Richard Angliss - Finance Expert

Updated: February 12, 2020

Whether you’re looking to save up for your first home or grow your money for retirement, a Lifetime ISA (LISA) can offer you two account types you can choose from: a cash-based or an investment-based LISA. But which account type will provide you with the best returns to match your appetite for risk?

In this article, we note the differences between cash-based and stocks and shares-based Lifetime ISAs, the pros and cons of both, and which is best for you.

What’s the difference between a cash and stocks and shares LISA?

The difference comes down to how your money is handled. A cash Lifetime ISA works like a standard cash savings account where you earn interest on the money you put in, whereas a stocks and shares ISA lets you put money into a range of different investments. Like with any other ISA, you can invest up to £4,000 per year.

It’s worth noting that you shouldn’t confuse Lifetime ISAs with cash ISAs and stocks and shares ISAs, as these are separate products in their own right.

Cash

A cash Lifetime ISA works in a similar way to a standard cash savings account where you earn interest on the money you put in and you don’t have to pay any fees to use it. This type of LISA is considered lower risk, as the money you put in is not invested on the stock market.

Stocks and shares

If you have more of an appetite for risk, a stocks and shares-based Lifetime ISA could provide you with better rates of return than a cash ISA. This is because a stocks and shares LISA provides you with the opportunity to invest in the stock market, unlike a cash ISA which operates in a similar way to a savings account.

While it won’t cost you anything to open a stocks and shares LISA, usually you will have to pay some management fees, which could be anywhere from 0.1% to 0.75%, depending on your LISA provider and how much you have in your pot. These will be deducted from the funds in your account and you will never be asked to pay for these out of your own pocket.

You may also face charges depending on whether you’ve invested in funds or shares. For example, if you have £10,000 in funds with a management charge of 0.45%, you will be charged £45. If you also have shares, say £3,000 at 0.45%, you’ll also have to pay £13.50 – a total of £58.50.

Any charges made to your account may appear insignificant in comparison to the benefits the dividends and growth your investments could generate, though these could rise or fall depending on the stock market’s performance. If you want a stocks and shares LISA with a history of consistent returns, speak with a financial expert. They can recommend accounts overseen by fund managers with a strong track record of generating steady returns.

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Will I still get the 25% bonus and tax benefits?

Yes, both are tax-efficient wrappers and you can still get a boosted 25% bonus on top of what you put in – just so long as you don’t make an early withdrawal or transfer out of the account. Even if you go with a stocks and shares Lifetime ISA, you won’t have to pay capital gains and income tax on your investments.

Which is better?

What’s better for one person won’t necessarily be better for you. When deciding between a cash LISA and a stocks and shares one, it may be beneficial to ask yourself the following questions:

  • Would you want access to your money at any time, or are you happy to leave it be?
  • Are you saving for a first home or retirement, or do you want to save for something else?
  • Would you be comfortable investing in stocks and shares, or would you prefer to play it safe with a cash account?

If you’re still unsure or want more information about these two ISAs, it’s worth speaking with an expert.

Speak to an expert

By working with an independent financial advisor, they can recommend the most suitable account type based on your needs and requirements, then use their whole-of-market access to source the best bespoke deals.

Make an enquiry or call 0808 189 0463 and we’ll put you in touch with one of the advisors we work with for a free, no-obligation chat.

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We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in ISAs. Ask us a question and we'll get the best expert to help.

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Richard Angliss

Richard Angliss

Finance Expert

About the author

Richard Angliss has made a career in financial services which stretches over 40 years.

His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.

For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.

At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.

With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them.  Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.

He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.

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