Lifetime ISA explained: the bonus, account types and withdrawal rules

The Lifetime ISA (LISA) is a government savings account available to UK residents aged 18 to 39. You can contribute up to £4,000 per year, and the government adds a 25 percent bonus on top of your contributions — up to £1,000 per year. This bonus is paid monthly. The LISA can be used for one of two purposes: buying your first home (on a property worth up to £450,000) or retirement from age 60. If you contribute the maximum £4,000 per year for 10 years, you will have contributed £40,000 and received £10,000 in government bonuses — plus any investment growth if held in a Stocks and Shares LISA. The bonus is one of the most generous government savings incentives available to young UK adults. You must open a LISA before your 40th birthday; once open, you can continue contributing until age 50. The 12-month rule: the LISA must have been open for at least 12 months before you can use it to buy a home.

LISAs come in two types. A Cash LISA works like a savings account — your money earns interest and is not at risk of falling in value. Suitable if you plan to use the funds to buy a home within the next few years. A Stocks and Shares LISA invests your contributions in funds, which means the value can go up or down. Over the long term, investments typically outperform cash, making a Stocks and Shares LISA better suited for retirement saving or for people with a home purchase timeline of five or more years. Providers include: Moneybox (both cash and Stocks and Shares), Nutmeg (Stocks and Shares), Hargreaves Lansdown (Stocks and Shares), and AJ Bell (Stocks and Shares). Cash LISA providers include Skipton Building Society. Compare platform fees, investment options, and user experience before choosing. You can transfer a LISA from one provider to another without losing the bonus, though check the transfer process carefully.

The LISA withdrawal rules are strict and it is crucial to understand them before putting money in. You can withdraw from your LISA without penalty only in three circumstances: to buy your first home (property must be £450,000 or less, purchased with a mortgage, and you must have held the LISA for at least 12 months); when you reach age 60; or if you are terminally ill with less than 12 months to live. For any other withdrawal, a 25 percent government penalty applies. This penalty is calculated on the withdrawal amount (including bonus), which means you effectively lose some of your own contributions, not just the bonus. For example, if you have £5,000 in your LISA (£4,000 contributions plus £1,000 bonus), and withdraw it unauthorised, you receive £3,750 — a loss of £250 of your own money. This makes the LISA unsuitable as an emergency fund or general savings account — only put money in that you are genuinely committed to using for a first home purchase or retirement.