Lifetime ISAs

What is a Lifetime ISA?

A Lifetime ISA, also known as a LISA, is a type of tax-free savings or investment account. It’s designed to help young people under the age of 40 save up for a deposit on their first home. Or to build up a comfortable retirement pot for their golden years.

How does a Lifetime ISA work?

Lifetime ISAs aren’t open to everyone, and there are certain rules that apply. Here’s a summary of the main ones:

• To set up a Lifetime ISA, you’ll need to be aged 18 or over but under 40 on the day you open the account. You also must make your first payment into the account before you turn 40.

• You can pay up to £4,000 a year into a LISA account. The government will then add a 25% bonus on top of anything you add, up to a maximum of £1,000 in each tax year.

• You’ll earn tax-free interest on any savings you build up, as well as on any returns on investments you’ve made with a stocks and shares LISA.

• You can continue to pay into a Lifetime ISA and get the 25% bonus each year until you’re 50. If you’re saving the money for your retirement, you’ll have to wait until you’re 60 to access your cash.

• Once you turn 50 you won’t be able to pay further money into your LISA or earn the 25% bonus. But your savings balance will keep getting investment returns or earn interest.

• You pay a 25% penalty if you withdraw the cash and use it for something other than buying your first home – unless you’re 60+ or are terminally ill.

• The Lifetime ISA limit of £4,000 counts towards your annual ISA limit. This will remain at £20,000 for the 2025/26 tax year. You’re allowed to split your ISA limit between a LISA and a cash ISA, stocks and shares ISA, and an innovative finance ISA.

How do I open a Lifetime ISA?

If you’ve found a LISA you like the look of, you’ll need to apply directly with the Lifetime ISA provider. You can usually do this online by filling out a form with your personal details, such as your name, date of birth, address, and National Insurance number.

You can start with as little as £1 and then choose to save regularly or make lump sum payments – up to £4,000 each tax year.

Anyone can gift you money to pay into your account, including parents and grandparents, but they can’t open and manage a Lifetime ISA for you.

Using a Lifetime ISA for buying a home

To use a Lifetime ISA to buy your first home:

• The property will need to cost £450,000 or less

• You’ll need to get a traditional repayment mortgage

• You must live in the home you’re buying and it can’t be rented out or used as a holiday home.

• You must never have owned a property (or a share of one) anywhere in the world before.

Before opening a LISA, think about house prices in your desired area. This is because you may not be able to use your savings if the home is above the price limit.

Only first-time buyers can use a Lifetime ISA for a home. If you’ve ever owned a home before (anywhere in the world) or part of a home, you can’t use a LISA to buy a property. This includes if you have inherited a home or owned a buy-to-let.

If you’re buying a home with a partner, you can both open a Lifetime ISA and benefit from the government bonuses. This helps speed up your deposit savings as you get a double bonus.

Using a Lifetime ISA for retirement

If you’re using your Lifetime ISA to build money for retirement:

• You’ll need to leave the money in your account until you turn 60 – this way you’ll avoid fees to withdraw it.

• After your 50th birthday, you’ll no longer be able to make any deposits, nor earn the government bonus. But your savings can still grow through interest or investment returns.

• At 60, you can withdraw your money without penalties and use it however you like. Any money left in the account will continue to earn interest or grow/shrink in line with your stock market investments.

We’d suggest getting proper financial advice if you’re thinking about whether to use a Lifetime ISA as a substitute for paying into a pension.

But be wary of giving up the option of a workplace pension where your employer pays money into that pot. This is because you’d essentially be giving away ‘free’ money. As with any savings account, the terms of the LISA could change before you turn 60.

Penalties for early withdrawal

Unless terminally ill, you’ll be forced to pay a withdrawal charge penalty if you:

• Withdraw from your Lifetime ISA before the age of 60

• Take out the money for something other than buying your first home if you’re younger.

The penalty for early withdrawal is 25% of the amount you’re taking out. This is a significant penalty, so you should think very carefully before making an early withdrawal.

For example, if you put £4,000 in and get the £1,000 bonus, you’ll have £5,000. If you then withdraw the full amount, the penalty would be 25% of £5,000 (£1,250). That leaves you with £3,750 – less than the original £4,000 you paid in.

Tips for maximising LISA Benefits

• Start early – the sooner you open a LISA, the more you can benefit from the annual government bonus and let it build up in your pot.

• Maximise contributions – if you’re able, and you're sure you’ll use the account to its maximum, it’s worth putting in the full £4,000 each year. This allows you to get the maximum £1,000 annual government bonus.

• Regular contributions – putting a little away on a regular basis can help you stay disciplined. You might find setting up a direct debit helpful.

• Joint approach – if you’re buying a home with a partner and you both fall into the criteria, you can both gain from the benefits of a Lifetime ISA.

• Shop around – once you’ve opened a LISA, you don’t have to stick with the same provider. It makes sense to do regular Lifetime ISA comparisons to see if you can get a better interest rate elsewhere. Just remember you can only pay into one LISA each tax year.

Lifetime ISA vs Help to Buy ISA

Both Lifetime ISAs and Help to Buy ISAs were designed to help first-time buyers. But as of 2019, Help to Buy ISAs are no longer available to new customers. If you already have a Help to Buy ISA and are thinking about switching to a LISA, here are a few things to think about:

• You can continue to save with your Help to Buy ISA until November 2029. As with a Lifetime ISA, you get a 25% bonus, but the maximum you can get is £3,000.

• With a Help to Buy ISA, the bonus isn’t applied until you buy a home, so you never earn interest on the bonus itself.

• You can only save up to £2,400 a year with Help to Buy compared with £4,000 for a LISA.

• A LISA must be open for at least a year to use it for a first home. So, it’s not worth switching to a LISA if you’ve already started the house-buying process.

• You can only transfer £4,000 each tax year into a LISA. If you have more than that saved in a Help to Buy ISA, you’ll need to wait until a new tax year to make another transfer.

• The house price limit on a Help to Buy ISA is £250,000 (£450,000 in London). This is significantly lower for many than the universal limit of £450k on a Lifetime ISA.

• You can withdraw money from a Help to Buy ISA without penalty for any reason but you can’t do that with a Lifetime ISA.

• You can only use one bonus for buying a home, not from both a Help to Buy or Lifetime ISA.

Who offers Lifetime ISAs?

There are only a handful of Lifetime ISA providers in the UK. Cash Lifetime ISA providers include Moneybox, Paragon, and Newcastle Building Society. There are also investment platforms that offer stocks and shares Lifetime ISAs including Hargreaves Lansdown, A J Bell, and Nutmeg.

To get the best Lifetime ISA for your needs, it’s worth comparing providers so you can make an informed decision. At Compare the Market, we currently only compare cash ISAs.