How the Lifetime ISA Works
You can open a Lifetime ISA if you're aged 18 to 39 and are a UK resident. You can save up to £4,000 per tax year (April to April) in cash or stocks and shares, and the government adds a 25% bonus on your contributions — paid monthly. So if you save £4,000 in a year, you receive a £1,000 bonus. You can continue contributing until you turn 50.
The bonus is paid directly into your LISA, usually within 4 to 9 weeks of your contribution. Interest or investment growth on top of the bonus is yours to keep. The maximum you can accumulate in bonus alone is £33,000 if you open at 18 and contribute the maximum every year until 50 — though most first-time buyers will use it well before then.
The LISA counts towards your overall annual ISA allowance of £20,000. So if you save £4,000 in a LISA, you can put up to £16,000 in other ISAs (Cash ISA, Stocks and Shares ISA, Innovative Finance ISA) in the same tax year.
Using Your LISA to Buy a Property
To use your LISA for a property purchase, the property must cost £450,000 or less, you must be a first-time buyer (never owned a property before, anywhere in the world), and the LISA must have been open for at least 12 months. The property must be purchased with a mortgage — you cannot use a LISA if buying outright with cash.
When you're ready to buy, your conveyancer (solicitor) requests the funds from your LISA provider, and the money is paid directly to them for use as part of your deposit on completion. You cannot withdraw the funds to your bank account and then use them — the transfer must go directly to the conveyancer.
If you're buying with another first-time buyer who also has a LISA, you can both use your LISAs for the same property purchase. This effectively doubles the bonus contribution towards your deposit.
The Withdrawal Penalty
If you withdraw from your LISA for any reason other than buying your first qualifying home or after age 60, you pay a 25% penalty on the amount withdrawn. This doesn't just claw back the bonus — it actually takes a slice of your own savings too.
Here's why: suppose you save £4,000 and receive a £1,000 bonus, giving you £5,000. Withdraw it for a non-qualifying purpose and the penalty is 25% of £5,000 = £1,250. You get back £3,750 — less than the £4,000 you put in. You've lost £250 of your own money plus the entire bonus.
The penalty was temporarily reduced to 20% during the COVID-19 pandemic (which merely clawed back the bonus without touching your savings) but reverted to 25% in April 2021. There is ongoing lobbying to change this permanently, but as of now, the 25% rate stands.
| Scenario | Amount saved | Bonus | Total in LISA | Penalty (25%) | You receive |
|---|---|---|---|---|---|
| Qualifying purchase | £4,000 | £1,000 | £5,000 | £0 | £5,000 |
| Non-qualifying withdrawal | £4,000 | £1,000 | £5,000 | £1,250 | £3,750 |
| After age 60 | £4,000 | £1,000 | £5,000 | £0 | £5,000 |
| Terminal illness | £4,000 | £1,000 | £5,000 | £0 | £5,000 |
LISA vs Help to Buy ISA and Other Schemes
The Help to Buy ISA closed to new applicants in November 2019, but existing holders can continue saving until November 2029. If you have both a Help to Buy ISA and a LISA, you can only use one of them for a property purchase — not both. In most cases, the LISA is the better option because it allows higher annual contributions (£4,000 vs £2,400) and the bonus is paid monthly rather than at completion.
Compared to other first-time buyer schemes, the LISA is unique in being a pure savings product with no shared equity, no loan to repay, and no restrictions on the property (other than the price cap and the mortgage requirement). First Homes, shared ownership, and other equity loan schemes involve ongoing obligations. The LISA bonus is yours to keep outright.
If you're saving for a deposit and are under 40, a LISA should almost certainly be part of your strategy — unless you expect to buy a property above £450,000, in which case the penalty trap makes it unsuitable.
Practical Tips for Maximising Your LISA
Start early. Even if you can only save small amounts, opening the account starts the 12-month qualifying period. A LISA opened with £1 in April gives you access to the full bonus when you start saving larger amounts months later.
If you can save more than £4,000 per year, put the first £4,000 in the LISA to capture the bonus, and the rest in a regular savings account or Cash ISA. The LISA cap is per person, so a couple saving jointly can shelter £8,000 per year with £2,000 in combined bonuses.
Consider whether a cash LISA or a stocks and shares LISA is right for your timeline. If you're planning to buy within 2 to 3 years, a cash LISA avoids the risk of your investments falling in value right when you need the money. If your timeline is 5 years or more, a stocks and shares LISA has historically delivered better returns — but with the risk of short-term losses.
Key Takeaways
- ✓The government adds a 25% bonus on up to £4,000 per year — that's £1,000 free annually
- ✓The property must cost £450,000 or less and you must be a first-time buyer
- ✓Your LISA must be open for at least 12 months before you can use it for a purchase
- ✓Non-qualifying withdrawals incur a 25% penalty that eats into your own savings, not just the bonus
- ✓Open your LISA as early as possible to start the 12-month clock, even with a minimal deposit
- ✓If you have both a Help to Buy ISA and a LISA, you can only use one for your purchase