Cash ISA vs Lifetime ISA: Which should I pick?

Why do I need an ISA?

ISAs provide individuals with a tax-efficient way to save money. Unlike other accounts, like general savings accounts, any interest you earn from the money you save into an ISA is tax-free. If you were to save into a general savings account, you might find your interest is taxed if you go over your Personal Savings Allowance. 

Personal Savings Allowance thresholds: Basic rate taxpayers can earn up to £1,000 interest tax-free each year, while higher-rate taxpayers can earn up to £500 interest tax-free. Additional rate taxpayers do not receive a Personal Savings Allowance.

ISAs allow you to keep all your earned interest for yourself, helping you reach your savings goals like saving for your first home faster. Explore our range of ISAs here.

How does the £20,000 ISA allowance work?

The total ISA allowance is £20,000 per tax year. This can be split across Cash ISAs, Stocks & Shares ISAs, and Lifetime ISAs (LISA). The maximum you can put into a Lifetime ISA is £4,000 per tax year, which counts towards your overall £20,000 ISA allowance total.

When considering opening a LISA, remember that withdrawals for any purpose other than buying a first home or for retirement will incur a 25% government penalty, meaning you may get back less than you paid in.

What’s the difference between a Cash ISA and a Lifetime ISA?

There are a number of key differences between Cash ISAs and Lifetime ISAs . Both Cash ISAs and Lifetime ISAs are individual savings accounts which let you save your money tax-free. A Cash ISA lets you save up to £20,000 each year, to be used for whatever you like. With a Lifetime ISA, you can only save up to £4,000 each tax year, and can only use the money to buy your first home or save for retirement.

But the Lifetime ISA comes with the additional benefit of a free 25% bonus from the government on top of your contributions, which a Cash ISA doesn’t get. This means that if you max out your LISA, you’ll get a £1,000 boost to your house fund each year.

Find out all about Lifetime ISAs and the tax year here.

Another key difference between a Cash ISA and a Lifetime ISA is your ability to withdraw money. If you choose an easy access Cash ISA, you can typically withdraw at any time. A Lifetime ISA has a 25% charge if funds are withdrawn for purposes other than a first home or retirement.

Both Cash ISAs and a Cash Lifetime ISA earn interest on your savings - the rate you get will depend on the product and provider. At Tembo, our Lifetime ISA offers a market-leading 4.1% AER (variable), which could increase your deposit by hundreds in interest over 5 years versus choosing the next available rate on the market.

If you choose a Stocks and Shares Lifetime ISA, the value of your investments will rise and fall based on changes in the stock market.

Before choosing a particular LISA, consider what you’ll use the money for and how long it’ll be until you need access to it. If you plan to buy a house, you may be best suited to a Cash LISA, particularly if you’d like to buy in the next 3-5 years.

Remember that a Lifetime ISA must be open for at least 12 months before you can use it for a home purchase, and you can only use it to buy a house up to the value of £450,000. If you’re opening a LISA to save for retirement, a Stocks and Shares LISA may result in better returns over the long term.

To learn more, take a look at our Cash Lifetime ISA vs Stocks and Shares Lifetime ISA guide.

Should I switch to a Lifetime ISA?

If you already have money in a Cash ISA, moving some or all of your savings over to a Lifetime ISA could help you speed up your deposit-saving. Both Cash ISAs and LISAs offer tax-free interest on your savings, but you’ll only get the 25% bonus from the government with a LISA.

Choose a LISA with a competitive interest rate and it’ll be even easier. The Tembo Cash Lifetime ISA offers a market-leading rate of 4.1% AER (variable). You can easily download our app and open an account in just a few minutes.

As you can only save up to £4,000 each tax year into a Lifetime ISA, if you can save more than this you could place the extra money into a Cash ISA. Or use a Cash ISA to save up the additional costs involved in buying a house, such as conveyancing fees, Stamp Duty and furniture.

Is it still worth having a Cash ISA?

A Cash ISA can be a great savings product - however, it depends on what you're saving for. If you’re a first-time buyer and you’d like to buy a property worth £450,000 or less, a Lifetime ISA may be more rewarding than a Cash ISA, but that doesn’t mean Cash ISAs aren’t worth having. If you need the flexibility to withdraw money quickly, for example to fund holidays or emergency payments, a Cash ISA might be a better choice.

Learn more: Can I keep my Lifetime ISA if I move abroad?

Can I have a Cash ISA and a Lifetime ISA?

Yes, you can open both a Cash ISA and a Lifetime ISA, and pay into both as part of your £20,000 ISA annual allowance. However, you cannot pay into more than one Lifetime ISA in the same tax year. 

*Based on saving £100 at the beginning of each month for 5-years. Calculations show at month 61 (after 5-years) Tembo customers saving at 4.10% would have £436.62 on average more than saving with Barclays, HSBC, NatWest or Lloyds. Accurate August 2025.