Is a Lifetime ISA worth it? How LISAs work and key rules

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 saving into one. It enjoyed a record-breaking year in 2024/25, with the number of people paying into an account on the platform up 24%, according to data from Hargreaves Lansdown.

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Before opening a LISA, there are some important restrictions to bear in mind. 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 rules are currently being looked at by the Treasury Committee, a cross-party group of MPs, after it launched a review of the Lifetime ISA in January 2025. However, recent comments from Emma Reynolds, economic secretary to the Treasury, have dampened hopes that the withdrawal penalty could be reduced or removed. The review is ongoing.

"Generally, people don’t plan to make ‘unauthorised’ withdrawals, but they end up doing so because life doesn’t always go according to the script," said Rachel Vahey, head of public policy at AJ Bell.

"If they could have avoided the charge, often they would, but they haven’t been able to. It’s not right we should penalise these investors because their plans have changed and they haven’t got the financial wriggle room to adapt," she added.

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.

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.

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.

Where are people using their LISA?

Despite their popularity, the LISA is only helping a limited number of people at present. Just 228,000 people have been able to use their LISA savings, according to new correspondence from HMRC accessed by Quilter.

London has been particularly negatively affected. Quilter found that only 18,350 people have used their LISA to help purchase their first home in the region since 2018, representing just 0.56% of the total number of first-time buyers aged 18-40 years old.

This is likely because of the controversial £450,000 house price cap being too low for the London housing market – where the average home costs an eye-watering £556,000 according to HM Land Registry data.

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 house purchase.

House buyers in the North West were also fans of LISAs as the region saw the second-highest level of use – 27,900 individuals used their government-boosted savings to buy their first home.

Meanwhile, buyers in the North East were the least likely to use a LISA to help buy a home in the region as just 7,650 individuals did this.

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 £268,000 – a 22% 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 (£385,000) and East of England (£338,000) are close to the limit, while typical London prices (£556,000) 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, LISA rules are currently under review. The Treasury Committee – a cross-party group of MPs – put out a call for evidence earlier this year.

The group has been seeking the views of consumers, experts and those working in the finance industry. Areas of focus have included 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.

Emma Reynolds, economic secretary to the Treasury, gave evidence to the committee's enquiry in April, and dampened hopes among those seeking changes to the withdrawal penalty.

"We did not design the LISA – I did not design it – but it is a voluntary savings product. People go into it with their eyes wide open," Reynolds said.

"We cannot have a risk-free option where you are investing for the long term, but there is no charge if you take it out… There has to be some penalty or withdrawal charge in a product such as this."

The review is ongoing.

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, published on 19 September, 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. 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.