How a Lifetime ISA works
A Lifetime ISA is a tax-free savings or investment account designed for two purposes: buying your first home or saving for retirement from age 60. The government adds a 25% bonus to everything you contribute, paid monthly by HMRC directly into your account. Every £800 you save becomes £1,000; every £4,000 becomes £5,000.
You can pay in up to £4,000 each tax year, which counts towards your overall annual ISA allowance of £20,000. The maximum bonus you can earn is therefore £1,000 per tax year. There is no minimum annual contribution, so you can save as little or as much as you like up to the cap, and the bonus is proportional to what you pay in.
There are two types of LISA. A cash Lifetime ISA works like a savings account and earns interest; it is the lower-risk option and suits buyers who expect to purchase within a few years. A stocks and shares Lifetime ISA invests in funds or other assets and offers the potential for higher long-term growth, but the value can fall as well as rise. Longer time horizons of five years or more tend to suit the investment version, while those buying soon typically prefer cash to avoid a falling market reducing their deposit.
The bonus is paid on contributions, not on growth or interest already earned. So if your cash LISA earns 4% interest, the bonus the following month is still calculated only on new money you pay in, not on the interest. This distinction matters when comparing total projected returns.
What you could accumulate in a Lifetime ISA
Illustrative figures based on maximum £4,000 annual contributions and a cash rate of 4%.
| Years saving | Your contributions | Government bonus | Interest (approx.) | Total (approx.) |
|---|---|---|---|---|
| 1 year | £4,000 | £1,000 | £200 | £5,200 |
| 3 years | £12,000 | £3,000 | £900 | £15,900 |
| 5 years | £20,000 | £5,000 | £2,200 | £27,200 |
| 10 years | £40,000 | £10,000 | £7,500 | £57,500 |
Figures are illustrative. Stocks and shares LISAs may return more or less depending on market performance. Interest is compounded annually at 4%.
Key Lifetime ISA rules at a glance
- Open between ages 18 and 39; once open, you can keep paying in until the day before your 50th birthday.
- Save up to £4,000 per tax year (counts towards your £20,000 ISA allowance).
- Receive a 25% government bonus, up to £1,000 a year, paid monthly.
- The property must cost £450,000 or less and be in the UK.
- You must be a first-time buyer buying with a mortgage (not cash).
- The account must have been open for at least 12 months before funds are used.
- Both buyers in a joint purchase can use their own LISA if both are first-time buyers.
- The LISA must be used in full or not at all; you cannot use a partial balance for the property.
How the LISA bonus is released on completion
The bonus goes to your conveyancer, not directly to you.
1. Confirm the 12-month rule
Check your account opening date. If it has been open for less than a year, you cannot use the LISA penalty-free.
2. Verify the property qualifies
The purchase price must be £450,000 or less. It must be in the UK and bought with a mortgage, not cash.
3. Instruct your conveyancer
Tell your solicitor you have a LISA. They will request the funds (contributions plus bonus) directly from your provider.
4. Funds transferred on completion
The full LISA balance, including the government bonus, is sent to your solicitor's completion account and applied to the purchase.
Lifetime ISA vs Help to Buy ISA
The Help to Buy ISA is closed to new savers but existing holders can keep contributing until November 2029.
| Feature | Lifetime ISA | Help to Buy ISA |
|---|---|---|
| Open to new savers | Yes | No (closed November 2019) |
| Maximum annual saving | £4,000 | £2,400 (£200 per month) |
| Maximum first-year saving | £4,000 | £3,400 (£1,200 initial + £200/month) |
| Bonus rate | 25% | 25% |
| Maximum annual bonus | £1,000 | £600 |
| Lifetime bonus cap | None specified | £3,000 |
| Property price cap | £450,000 (UK-wide) | £250,000 (£450,000 in London) |
| When bonus is paid | Monthly, into the account | On completion only |
| Penalty for early withdrawal | 25% on total including bonus | No penalty (just no bonus) |
You cannot use the government bonus from both a LISA and a Help to Buy ISA on the same property purchase.
The 25% withdrawal penalty explained
If you withdraw funds from a Lifetime ISA for any reason other than buying a qualifying first home, terminal illness, or reaching age 60, HMRC charges a 25% penalty on the full withdrawal amount, which includes the bonus. Because the penalty is applied to the gross amount (your money plus the bonus), you can end up with less than you originally paid in. For example: if you save £4,000 and the bonus brings the total to £5,000, a 25% penalty on £5,000 is £1,250, leaving you with £3,750, which is £250 less than you contributed. Only save in a LISA money you are confident you will use for a first home purchase or retirement.
Open a LISA early, even with a small amount
The 12-month qualifying period starts from the day you open the account, not when you save a significant sum. Opening a LISA with as little as £1 today starts the clock running. If you are considering buying within the next one to three years, open an account immediately so you do not miss the qualifying window.