If you’re looking to get onto the housing ladder but are struggling to stitch together a mortgage deposit, a Lifetime ISA (LISA) could be a good option for you.
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 more than 1.5 million people currently saving into one. It has enjoyed a record-breaking year so far in 2024/25, according to data from Hargreaves Lansdown, with the number of people paying into an account on the platform up 24%.
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However, 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 good news is that the rules could change in the future, after the Treasury Committee – a cross-party group of MPs – launched a review of the Lifetime ISA in January 2025.
“Lifetime ISAs are an extremely attractive way for people to invest for the future in specific circumstances,” says Tom Selby, director of public policy at AJ Bell.
“For first-time buyers in particular, a Lifetime ISA is a brilliant way to build up a deposit for a first home and benefit from a sizeable government bonus, as well as enjoying the ability to invest tax-free like a conventional ISA,” he adds.
“However, Lifetime ISAs aren’t perfect and this review from the Treasury Committee is a good opportunity to address some of the issues with their design, as well as exploring where the Lifetime ISA fits in a simplified ISA landscape.”
We take a closer look at how the Lifetime ISA works and whether it is 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. 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.
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 2024/25 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.
However, as we have previously introduced, 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.
Why are Lifetime ISA rules unpopular?
There are a few reasons why 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 £290,000 – a 32% 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 (£378,000) and East of England (£340,000) are close to the limit, while typical London prices (£511,000) are likely to be 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.
What is the Lifetime ISA review?
As introduced previously, the good news is that LISA rules could be about to change after the Treasury Committee – a cross-party group of MPs – launched a review into the savings vehicle in January 2025.
The group put out a call for evidence, seeking the views of consumers, experts and those working in the finance industry. Areas of focus include the 25% withdrawal penalty, the house price cap, and more. The idea is to understand whether the LISA is still fit for purpose nine years after it was first proposed.
The call for evidence closed on 4 February, meaning an update is likely to follow in the weeks or months to come.
Is the Lifetime ISA still worth it?
A 25% bonus on top of your savings sounds very attractive. It’s a much higher annual rate than you’d 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, which were published on 19 September, there was a 31% jump in the number of people making so-called ‘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. A good first step could be weighing up how much your first home 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.
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