What is a Lifetime ISA (LISA), and how does it work?

If you’re planning to buy your first home, a Lifetime ISA could be a useful way to boost your deposit.

We look at what a Lifetime ISA is, how it works, eligibility and the pros and cons.  

What is a Lifetime ISA?

A Lifetime Individual Savings Account (LISA) is a tax-free savings account that you can use to buy your first home or save for retirement.

You can hold cash or stocks and shares, or both, in your LISA. 

You can save up to £4,000 annually into a LISA and get a 25% bonus, up to £1,000 every year, until you’re 50.  

It’s worth stressing that this allowance is part of your overall annual ISA allowance, which is currently £20,000 as of the 2024/25 tax year. 

How does a Lifetime ISA work?

If you want to use a LISA to buy your first home, open an account as soon as possible, as you can’t use it for a deposit until at least 12 months after your first payment into the account. 

You can earn interest on your balance, which is tax-free as your funds are held in an ISA, so this doesn’t affect your personal savings allowance.

You can also keep contributing after you’ve bought your home and save for later life.  

If you choose a stocks and shares LISA, you pay no tax on dividends, capital gains or interest – but you need to accept an element of risk as the value of your investments can rise and fall.  

And if you’re buying a home with someone else, you can both use a LISA, including the government bonus, but you must be first-time buyers and meet the eligibility conditions.  

Who can open a Lifetime ISA?

Unlike other ISAs, you can only open a LISA if: 

• You’re aged between 18 and 39. You must make your first payment before you turn 40. 
• You are a UK resident or a Crown servant.

Many banks, building societies and investment companies offer Lifetime ISAs and different interest rates, so it’s worth shopping around.

You can usually apply for and open an account online. 

If you want to use your LISA to save for your first home, you’ll need to ensure the property you plan to buy costs £450,000 or less and that you’re using a mortgage to finance it.  

A conveyancer or solicitor is needed to act on your behalf, as your LISA provider will pay the money to them.

You must ensure the property purchase is completed within 90 days of your LISA savings being sent to your solicitor.  

When is the Lifetime ISA bonus paid?  

Your bonus payments are calculated on a monthly basis and are based on contributions made on the 6th of the month to the 5th of the following month.

For example, your January bonus will be based on contributions made between 6th January and 5th February.  

If you choose a stocks and shares LISA, it’s worth checking if your bonus will be reinvested into your investments.  

Can you withdraw money from a Lifetime ISA? 

You can withdraw funds from a LISA if it’s for your first home, you are aged 60 or over or if you have less than a year to live.  

If you take money out for any other reason, you’ll pay a 25% withdrawal charge, as this is seen as an unauthorised withdrawal.

This penalty means not only does the government get its bonus back, but you’ll lose out on some money.  

For example, if you pay £1,000 into a LISA and the government tops this up by 25% (£250), you’ll have £1,250. If you withdraw this and it’s unauthorised, a 25% charge will apply, leaving you with £937.50.  

Are there any lifetime ISA restrictions?

As mentioned, the Lifetime ISA is only available for those aged between 18 and 39. 

You can contribute to a LISA until the day before your 50th birthday, but you’ll still get interest and investment returns (if applicable) on your balance.  

You can hold more than one Lifetime ISA (if opened in a different tax year) or transfer it to another provider, but you can only pay into one account each year.   

While you can transfer funds from an ISA into a Lifetime ISA, the £4,000 annual limit still applies.  

If you have a Help to Buy ISA (which is now closed to new customers) and a Lifetime ISA, you can only use the government bonus from one of them for your first home. 

Is my money safe in a Lifetime ISA? 

As long as the provider you use is covered by the Financial Services Compensation Scheme (FSCS), up to £85,000 in a cash LISA is protected. 

If you have more than £85,000 with a provider, it’s worth saving the excess with another bank or building society to ensure your funds are protected. 

If you are considering a stocks and shares LISA, your funds will be protected if your ISA provider goes under, but not if your underlying investment goes bust, so this is worth considering. 

What are the pros and cons of a lifetime ISA?

There are many advantages to Lifetime ISAs, including: 

• Up to a £1,000 bonus every year from the government to go towards your house deposit (between the ages of 18 and 50). 
• Getting capital gains, dividends and interest tax-free. 
• Both you and your partner being able to use Lifetime ISAs (and bonuses) for your first home.
• Being able to transfer your Lifetime ISA or money from other ISAs to your account. 
• Any funds up to £85,000 held in an account can get FSCS protection (if the provider offers this). 

However, there are many drawbacks to consider before opening a LISA, including: 

• You have to be aged between 18 and 39 to open a LISA, and you can only contribute until the day before your 50th birthday. 
• You’ll be subject to a 25% withdrawal charge if it’s unauthorised. 
• You can only use the account to buy a home worth up to £450,000 at least 12 months after opening a LISA, plus you need to use a mortgage and have a solicitor or conveyancer.  

Get expert financial advice

A LISA is a valuable tool which could help you to invest and maximise your money to put towards your first home or your retirement pot.

LISAs can hold both cash and stocks and shares, and allow you to save up to £4,000 each year and enjoy a 25% bonus up to £1,000 a year, courtesy of the UK government.

Let Unbiased connect you with an expert financial adviser who can help you assess your eligibility for opening a LISA, navigate maximum contribution limits and potential fees, and grow your savings to support your first home purchase or your financial security after retirement.