How does the Lifetime ISA work? Key LISA rules
What is a Lifetime ISA (LISA) and how much could the government bonus boost your savings by? We look at the perks and the pitfalls.
A Lifetime ISA (LISA) could be a good option if you're looking to get onto the housing ladder but are struggling to stitch together a mortgage deposit.
While there are several types of ISA, LISAs are specifically aimed at those looking to buy their first home or save for retirement. As well as its tax wrapper, the account is an attractive option for savers because it comes with a juicy government bonus.
The LISA is a popular savings vehicle, with around 1.3 million accounts open at the end of the 2023/24 tax year, according to HMRC data. Around 6% of the population eligible for a LISA has held one since the vehicle was launched eight years ago.
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Despite this, there are some important restrictions to bear in mind before opening a LISA. Those who fail to adhere to the terms and conditions around withdrawals could be slapped with a 25% penalty that can leave many savers worse off.
The Treasury Committee, a cross-party group of MPs, launched a LISA review at the start of 2025, assessing whether the LISA is still fit for purpose. It published its findings in a damning report on 30 June.
MPs concluded that confusion around the LISA withdrawal charge put savers at risk of losing a significant part of their savings if forced to unexpectedly withdraw the money in unforeseen circumstances, rather than using it for a house purchase or retirement, as intended.
MPs also questioned whether the dual purpose of the LISA – focused on both homeownership and retirement – made the product overly complex and risked deterring savers from more productive pension saving.
Nevertheless, the juicy 25% government bonus, worth up to £1,000 per year, has helped almost 230,000 savers get onto the property ladder since LISAs were launched.
The savings vehicle can also be a good option for some self-employed workers, offering a more flexible alternative to a pension. The government bonus can also help compensate them for their lack of employer pension contributions.
“Reform of Lifetime ISAs is what is needed here – not abandonment," said Carol Knight, chief executive of non-profit organisation The Investing and Saving Alliance (TISA). "The Lifetime ISA provides clear benefits for savers, whether they’re saving to buy their first home or building a retirement fund."
She added: “Concerns around its suitability for retirement saving, particularly if consumers are using cash LISAs, withdrawal fees and the house price cap highlight the need for reform.
“Dismantling this product entirely would be a short-sighted mistake as they have helped young people develop long-term saving habits and supported many to take their first step onto the property ladder. It is also a good alternative retirement product, especially for the self-employed.”
We take a closer look at how the Lifetime ISA works and whether LISAs are worth it.
How does the Lifetime ISA work?
Like all ISAs, the Lifetime ISA is a tax-efficient way to save money because any interest and investment gains are tax-free.
The unique appeal of the LISA is that you also get a 25% government bonus of up to £1,000 per tax year. For example, if you pay £2,000 into your LISA in a tax year, you’ll receive a £500 top-up, while if you pay in £4,000 you’ll get the full £1,000.
To open one, you must be aged between 18 and 39. You can then pay in up to £4,000 each year until you turn 50. This money counts towards your annual ISA limit (£20,000 for the 2025/26 tax year). Like adult ISAs and junior ISAs, you can hold cash or stocks and shares in a LISA.
The money you build up can be used to buy a first home that’s worth up to £450,000. Or, you can use the money later in life, with penalty-free withdrawals permitted once you turn 60. You can also access the account fee-free if you’re terminally ill and have less than 12 months left to live.
The downside is you will get penalised for making a withdrawal for any other reason. The exit charge is 25% of your pot. Not only does this effectively take away the government bonus, but it also eats into some of your own money too.
For example, if you have built up a pot of £10,000, your government bonus would take it to £12,500. An ‘unauthorised withdrawal’ would mean you lose that bonus, plus £625 of your own savings, as 25% of £12,500 is £3,125. So, your initial £10,000 pot would become £9,375.
The exit fee also applies if you try to use the cash on a property costing more than £450,000.
“Anyone who exceeds the £450,000 limit, even by just £1, will be hit with the 25% exit charge on the Lifetime ISA, as their purchase will no longer be within the rules,” notes Laura Suter, head of personal finance at AJ Bell.
The exit fee was previously reduced to 20% during the coronavirus pandemic after an outcry over its unfairness – but it reverted back to 25% in April 2021.
Where are people using their LISA?
Despite its popularity, the house price cap means the LISA is more helpful in some regions than others. The average house price in London is now almost £567,000 according to official figures from HM Land Registry – significantly higher than the cap.
Recent data shows only 18,350 people have used their LISA to purchase a first home in London since 2018, equivalent to 0.56% of all first-time buyers aged 18-40.
Despite the low take-up in London, other areas of the UK have seen more usage. The South East saw the highest number of LISA-users, with 38,650 using the savings vehicle to help with their first purchase.
House buyers in the North West were also fans of the LISA, with the region seeing the second-highest level of use. Almost 28,000 individuals used their government-boosted savings to buy their first home.
Buyers in the North East were the least likely to use a LISA to buy a home, with just 7,650 individuals using the savings vehicle to help fund a purchase.
Why are Lifetime ISA rules unpopular?
There are a few reasons experts have been calling for LISA reforms – not least because the £450,000 house price cap is considered outdated.
When the Lifetime ISA first launched, the average UK house price was £220,000, according to official data from HM Land Registry. Today, average prices are £265,000 – a 20% increase. The LISA limit has never been updated to reflect the significant increase in prices.
Furthermore, regional disparities in house prices have created a sense of unfairness.
Official data suggests those in southern England would struggle the most to get on the housing ladder using a LISA. Average prices in the South East (£380,000) are relatively close to the limit, while typical London prices (£567,000) are out of reach altogether.
Having already struggled to get on the housing ladder thanks to sky-high prices, those living in these areas could then be penalised further by the LISA exit fine.
Despite this, the state of the government’s finances could make reform unlikely in this area.
The LISA review recently concluded: “The house price cap for the Lifetime ISA ensures that government spending supports those who need financial assistance the most. Any increase in the price cap is an increase in government spending.
“Before considering any increase in the house price cap, the government must analyse whether the Lifetime ISA is the most effective way in which to spend taxpayers’ money to support first-time buyers.”
Is the Lifetime ISA worth it?
A 25% bonus on top of your savings sounds very attractive. It’s a much higher annual rate than you would be likely to get from other forms of ISA. However, you need to make sure you are comfortable with the risks. An increasing number of savers have been burned by the rules around withdrawals in recent years.
According to the latest annual HMRC LISA statistics, published on 19 September 2024, there was a 31% jump in the number of people making ‘unauthorised’ withdrawals in 2023/24 versus the year before. The 99,650 people who raided their LISAs faced a combined £75.3 million in withdrawal charges, or an average of £755 per person.
Those who needed to raid their pot to pay for immediate spending may have been better off building a larger emergency fund first, held in an easy-access savings account.
That said, there are a lot of positive LISA stories too. A survey from Moneybox, the UK’s largest provider of Lifetime ISAs, revealed that 81% of savers felt motivated to save more frequently after opening a LISA. The average withdrawal made by Moneybox savers last year was £13,500, which included an average government bonus of £2,500.
As ever, the key consideration is whether this savings product matches your financial goals. If you are saving for a first home, a good first step could be weighing up how much the property is likely to cost, and how secure your finances are overall. If you think you might end up breaking the rules, a different savings vehicle might be a better option for you.
Is the Lifetime ISA worth it when saving for retirement?
If you are thinking about using a LISA to save for retirement, there are even more factors to consider.
First of all, you need to weigh up whether your money could be put to better use in a traditional pension, where you can potentially benefit from employer contributions and pension tax relief.
You also need to be careful about what sort of LISA you are using. A cash LISA is not an efficient use of your money for this purpose. Given the length of your investment horizon when saving for retirement, a stocks and shares LISA is likely to be far more productive.
“The sweet spot of the LISA can rest in its ability to boost retirement savings among the self-employed. This is a group that has long under-saved into pensions,” said Helen Morrissey, head of retirement analysis at investment platform Hargreaves Lansdown.
Hargreaves Lansdown data shows that only 21% of self-employed households are on track for a moderate retirement, compared to 36% of households overall. Morrissey calls it a “pressing issue” and one that the LISA could help alleviate.
“Self-employed people can be hesitant to save into a pension because of their variable income and the fact they can’t access their money until at least the age of 55. This is compounded by the fact that they don’t get an employer contribution,” she said.
“The 25% bonus on a LISA acts in the same ways as basic-rate tax relief on a pension and the money can be accessed if needed, subject to a penalty. Added to this, any income can be taken tax free.”
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Katie has a background in investment writing and is interested in everything to do with personal finance, politics, and investing. She enjoys translating complex topics into easy-to-understand stories to help people make the most of their money.
Katie believes investing shouldn’t be complicated, and that demystifying it can help normal people improve their lives.
Before joining the MoneyWeek team, Katie worked as an investment writer at Invesco, a global asset management firm. She joined the company as a graduate in 2019. While there, she wrote about the global economy, bond markets, alternative investments and UK equities.
Katie loves writing and studied English at the University of Cambridge. Outside of work, she enjoys going to the theatre, reading novels, travelling and trying new restaurants with friends.
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