Lifetime ISA (LISA) explained: bonus, rules and the penalty
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Quick answer: A Lifetime ISA lets 18 to 39-year-olds save up to 4,000 pounds a year and get a 25% government bonus (up to 1,000 pounds a year) towards a first home worth up to 450,000 pounds, or for retirement from age 60. Withdraw for anything else and you pay a 25% charge.
The Lifetime ISA (LISA) is a tax-free savings account with a government top-up, designed for two specific goals: buying your first home or saving for later life. The 25% bonus is generous, but the rules are strict and the withdrawal penalty can leave you with less than you put in, so it is important to understand how it works before opening one.
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Read the full savings & ISAs guide →Quick answer: What is a Lifetime ISA? →Primary source: www.gov.uk/lifetime-isa
How the 25% bonus works
For every 4 pounds you save, the government adds 1 pound, up to a maximum bonus of 1,000 pounds a year on the full 4,000 pound limit. The bonus is paid monthly and then earns interest or investment returns itself.
You can hold a Cash LISA (like a savings account) or a Stocks & Shares LISA (invested for growth over the longer term). The 4,000 pound paid in counts towards your 20,000 pound annual ISA allowance, leaving 16,000 pounds for other ISAs.
Using a LISA to buy a first home
You can put the money plus bonus towards a first home costing up to 450,000 pounds, provided you have never owned property anywhere in the world, you buy with a mortgage, and the account has been open at least 12 months.
If you buy with a partner who also has a LISA, you can both use your accounts and bonuses on the same property. The money is paid to your conveyancer at completion, not to you directly.
The penalty and when a LISA may not suit you
If you withdraw for any reason other than a first home, reaching age 60, or terminal illness, you pay a 25% government charge. Because that charge applies to the bonus as well as your own money, you can get back less than you paid in.
For retirement, a workplace pension is often better because employer contributions are effectively free money and pensions can offer higher tax relief. A LISA can complement a pension, but compare both before relying on it alone.
Common questions
Can I use a Lifetime ISA with someone else buying the same home?
Yes. If you both qualify as first-time buyers and each hold a LISA, you can both use your savings and 25% bonuses towards the same property, as long as it costs no more than 450,000 pounds.
What is the catch with the 25% penalty?
The withdrawal charge is 25% of the amount taken out, which is proportionally more than the 25% bonus you received, so an unauthorised withdrawal can leave you with less than you originally deposited.
Is a LISA better than a pension for retirement?
Usually not on its own. Workplace pensions add employer contributions and can give higher-rate tax relief, while LISA savings can affect some means-tested benefits. Many people use a LISA alongside, not instead of, a pension.