Lifetime ISAs (LISAs) are a type of ISA. They are a combined savings product intended both for First Time Buyers to save their deposit and for anybody to save for retirement.
Using a LISA you receive a top up ‘bonus’ to your contributions, to help you build your savings faster. However, if you want to use your LISA savings for anything other than those two purposes, you will be charged a penalty.
Contents
How do Lifetime ISAs work?
You can save up to £4,000 in a LISA per tax year. The government will give you a 25% bonus on any contributions, for example:
- Put £2,000 into the LISA and get a £500 bonus
- Put the full £4,000 get a £1,000 bonus
ℹ️ The bonus is paid within two months of your contributions.
LISAs can be either cash (getting paid interest by a bank or building society) or Stocks & Shares (where you aim to make returns on your chosen investments). Both will receive the government bonus.
The £4,000 annual LISA allowance come within the overall ISA annual contribution limit of £20,000. More info on ISAs. Like all ISAs the money within it is sheltered from income and capital gains tax.
LISAs can be opened by anyone aged between 18 and 39 (the cut off is the day before your 40th birthday) who is resident in the UK. You cannot pay in to a LISA once you turn 50 (again the cut off is the day before your 50th birthday).
Using a LISA to buy your first home
To use your LISA to buy a house:
- You must be a first time buyer (as per these eligibility rules)
- The property you’re buying must be in the UK and worth under £450,000
- You must be purchasing the property to live in (not rent out)
- Your LISA needs to have been open at least 12 months
If you are buying together with a partner and are both first time buyers, then you can both use LISAs (double bonus!). The property still cannot be worth more than £450,000.
If only one of you is a first time buyer, that person can still put money from their LISA towards the purchase.
Your deposit is not limited to what you have in the LISA. You can use additional money from other savings or bank accounts towards your home purchase alongside the LISA balance.
⚠️ Do not withdraw funds yourself!
Your conveyancer will need to arrange the use of your LISA to ensure you keep the bonus – the funds will be paid directly to them.
Using a LISA to save for retirement
If you are considering saving in a LISA for your retirement, you will want to compare this to using a pension.
For a detailed list of the pros and cons see our page on LISA vs pension.
Withdrawing with a penalty
You can withdraw money from your LISA at any time. However, if it is not done as part of an eligible house purchase, or at over age 60, the withdrawal will be subject to a penalty of 25%.
This works out to losing the whole bonus, and 6.25% of your contributions (and of any interest or growth).
What LISA should I get?
If you intend to purchase a house within the next five years, a Cash LISA is most likely to be suitable. If you think it will be more than five years before you buy, you can consider a S&S LISA to invest your savings. Money Saving Expert maintain a Best Buys list for both.
If you’re using a LISA to save for retirement, you’ll want a S&S LISA. Pensions are invested for a reason – in the long term, cash savings struggle to keep up with inflation, and almost certainly won’t grow enough to keep you flush in retirement decades away.
What if £450,000 isn’t enough?
The limit £450,000 was set when LISAs were first released in 2017, and has not been increased, nor (as of 2024) have there been any announced plans to increase it or remove the penalty for buying an ineligible property.
There are many places in the UK where £450,000 is more than enough for most first-time buyers, but in London and the South East buyers may not be confident they’ll find somewhere they want to buy under the limit, especially looking 5-10 years ahead. It can therefore be difficult to decide whether to use a LISA or not.
If you’re uncertain, here are some things to consider:
- What are the current prices of properties you would be interested in? Check Rightmove/zoopla.
- What’s the maximum you could afford on your income and savings? See our page on mortgage borrowing. As a quick illustration, to buy a £450,000 property with a £50,000 deposit and £400,000 mortgage you would generally need an income of about £90,000 (by yourself, or combined with a partner). How does this line up with your expected pay progression?
- How set are you on the area? If you are unable to afford local properties, do you intend to continue renting indefinitely, or to eventually move somewhere more affordable and buy there? What are property prices like in other areas you might be interested in?
And if that hasn’t resolved your uncertainty, some practical suggestions:
- Open a LISA with £1 just in case. If you end up buying a LISA-eligible property you can at least get one £1000 bonus, if not more.
- Don’t use a LISA with a hope/assumption that the price limit will increase by the time you need it.
- If you do save using the LISA, don’t think of the bonus as part of your savings total until you know if you can use it or not. That way you won’t think of yourself as having e.g. £20k saved then have to adjust down to £15k, instead you’ll consider yourself to have £16k saved and either adjust down to £15k or up to £20k.
- Don’t let this keep you up at night. You can’t know the future perfectly, and the LISA is unfortunately just poorly designed in a way that creates a lot of anxiety and FOMO. But don’t put too much weight on it – whichever option you choose and whether you win out or lose out from it, it is unlikely to make the difference between being able to buy or not.
Martin Lewis, of Money Saving Expert fame, has been campaigning for the government to make changes, as he believes LISAs are now a “dead duck product”. You can read more about this here.
Help to Buy (H2B) ISA – no longer available to new savers
ℹ️ The Help to Buy ISA was replaced by the Lifetime ISA (LISA).
This section has been kept as a reference for those still holding them.
They’re a little bit different from LISAs in the following ways:
- The government bonus is only paid when you buy an eligible property
- The value of the property is capped at £250,000 outside London and £450,000 inside London
- The maximum bonus is £3,000 (which would require £12,000 in your H2B ISA)
- You can take the money out whenever you want, but you will not receive the bonus. Unlike LISA, there is no penalty
- You can pay in a maximum of £200 per month
- You will stop being able to contribute to a H2B ISA in November 2029
- You can transfer up to £4,000 per year from a H2B ISA to a LISA. This transfer uses your LISA contribution limit, but not your overall £20,000 ISA contribution limit.
What if I have a H2B ISA and a LISA?
If you have savings in both a H2B ISA and a LISA, you cannot get both bonuses during a house purchase. You can use your LISA (with bonus), and withdraw your H2B without penalty. Alternatively you can apply for the H2B bonus, and either withdraw your LISA savings with the 25% penalty, or leave them for retirement.