If you’re looking to save for your first home, or want to build up a retirement pot, a Lifetime ISA (LISA) could be a smart way to boost your savings. But like any financial product, it’s essential to weigh up the pros and cons to decide if it’s right for you.
What is a LISA?
A LISA is a tax-free savings account designed to help people aged 18 – 39 buy their first home, save for retirement, or both. You can contribute up to £4,000 each tax year and the Government adds a 25% bonus to your contributions. If you save the maximum amount, the bonus will top up your savings pot by £1,000 per year.
The Benefits
- Government bonus: The standout benefit is the 25% bonus from the Government, which could significantly boost your savings. If you max out your allowance, you could receive £1,000 every year until you’re 50.
- Tax-free growth: Any interest or investment growth in your LISA is tax-free, which could help your savings grow faster.
- Helping first-time buyers: If you’re saving to buy your first home, the LISA bonus could help you scrape together that deposit sooner.
- Long-term savings: If you’re using a LISA for retirement, the LISA can provide a valuable top-up to your pension savings.
The Drawbacks
- Property price cap. The LISA has a £450,000 property price limit, which could be restrictive in areas with higher property prices.
- Age restrictions. You must open a LISA before you turn 40, and contributions stop at age 50 – making it less flexible than other savings options.
- Not a pension replacement. LISAs can complement pensions but shouldn’t be seen as a replacement. Workplace pensions with employer contributions might offer better long-term benefits, but this depends on your individual circumstances.
- Counts towards yearly limit. Any money you put into your LISA counts towards your overall ISA limit, which is £20,000 a year. So if you put £4,000 into your LISA, you can only put £16,000 into other ISAs (if you are fortunate enough to have that much to put away!).
- Withdrawal penalty. If you withdraw money for anything other than buying your first home, retirement (after age 60), or due to a terminal illness, you’ll face a 25% penalty. If the property you want to buy is more expensive than the £450,000 limit, this is still counted as an ‘unauthorised withdrawal’ outside the LISA’s terms, so you will still have to pay the 25% charge. This can be difficult to get your head around, so we’ve broken it down with an example below.
The 25% penalty explained
While 25% might sound like you’re simply giving back the Government bonus, the penalty actually means you’ll lose some of your own savings, too.
Example
Imagine you contribute £4,000 into your LISA. The Government adds a 25% bonus (£1,000), bringing your total savings to £5,000.
If you need to withdraw your savings early or for a reason that doesn’t qualify, the 25% penalty would apply to the entire amount: £5,000 x 25% = £1,250 penalty
After the penalty is deducted, you would receive £3,750. That’s £250 less than the original £4,000 you had saved yourself.
This means the penalty doesn’t just claw back the Government bonus – it also eats into your own savings.
Is a LISA Right for You?
A LISA can be an excellent option if you’re a first-time buyer looking to maximise your deposit savings. It can also support retirement savings, especially if you’re self-employed without a workplace pension. But, the withdrawal restrictions and property price cap mean it’s not the best fit for everyone.
Before opening a LISA, consider your savings goals carefully. Depending on how soon you’ll need the money, another savings account might offer greater flexibility.
*Figures and thresholds correct as of 27 February 2025
