What is a Lifetime ISA, and is it worth it?

What is a Lifetime ISA?

A Lifetime ISA (LISA) is a type of ISA designed for two goals: buying your first home or saving for later life. You can put in up to £4,000 each tax year, and the government adds a 25% bonus, up to £1,000 a year. Like other ISAs, you don't pay tax on the interest or investment growth.

It can hold cash or investments (stocks and shares). Investments can go down as well as up, so you could get back less than you put in. Cash is steadier but grows more slowly.

Who can open one?

You must be 18 or over and make your first payment before you turn 40. You can keep paying in, and getting the bonus, until you're 50. After that the account stays open and keeps earning interest or returns, but no more payments or bonuses.

The £4,000 counts towards your overall ISA allowance of £20,000 a year. One change to know about: From 6 April 2027 annual cash ISA subscription limit falls to £12,000 for under-65s; overall £20,000 ISA limit unchanged; 65+ keep full £20,000 cash.

When can you take the money out without a penalty?

Only in three situations:

• buying your first home, which must cost £450,000 or less, at least 12 months after your first payment, with a mortgage and through a solicitor or conveyancer;
• you're aged 60 or over;
• you're terminally ill, with less than 12 months to live.

Our lesson The Lifetime ISA shows these rules in action.

The withdrawal charge: the string with teeth

Take money out for any other reason and you pay a 25% withdrawal charge on the amount you withdraw. That sounds like it just takes back the bonus. It doesn't. It takes back more.

GOV.UK's own example: you pay in £800 and get a £200 bonus, so you have £1,000. Withdraw it all and the 25% charge is £250, leaving you £750. You've lost £50 of your own money as well as the whole bonus.

The same thing happens if your first home ends up costing more than £450,000: you can't use the LISA for it without the charge. House prices vary hugely around the UK, so whether that cap works for you depends a lot on where you want to live.

Is it worth it? Things to weigh up

We don't give advice, but here are the questions that decide whether a LISA fits someone's situation:

• How sure are you about the goal? A LISA rewards you for sticking to the plan and penalises you for changing it. If there's a real chance you'll need the money for something else, the charge matters.
• When might you buy? You need at least 12 months between the first payment and buying.
• Where might you buy? Check whether homes you're looking at are likely to fit under £450,000.
• Do you have an emergency fund elsewhere? Money you might need at short notice doesn't belong in a LISA. See How big is an emergency fund?
• Cash or investments? Over a short time, investments can fall just when you need them.

LISA vs a workplace pension for retirement

For later-life saving, a LISA is not the same as a pension. If you're employed and auto-enrolled, your employer must pay in at least 3% of qualifying earnings, and pensions get tax relief. A LISA gets no employer money. Opting out of a workplace pension to pay into a LISA instead can mean giving up your employer's contribution. Pensions also have their own rules about when you can access the money. Our lesson Free money from your boss explains the employer bit.

The bit to remember

The Lifetime ISA's 25% bonus is genuinely generous if you use it for a first home under £450,000 or keep it until 60. Use it for anything else and the 25% charge takes back the bonus and a slice of your own savings. Explore more in the free buying a home library and the lesson Lifetime ISA: bonus or trap?