Lifetime Isas, how they work and how to make the most of free top-up money from the government

Independent

30-04-2025

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Under 40? Thinking about buying your first home or putting money aside for your pension? You might want to consider investing in a Lifetime ISA (Lisa).
This is because the government gives you a bonus of 25 per cent on top of everything you put in. That means you could receive £1,000 of free money each year, if you deposit the maximum amount of £4,000.
However, there are a few catches.
You can only use your Lisa savings to fund the cost of your first home or your retirement. There is a penalty for making any withdrawals that fall outside of these rules, unless you are terminally ill.
Here's how Lisas work, who they're best for and how to make sure you're getting the most out of yours.
What is a Lifetime ISA?
This is a type of Individual Savings Account (Isa) to help you save towards your first home or for retirement.
Anyone aged between 18 and 39 can open one and save up to £4,000 each tax year, which runs from 6 April to 5 April the following year. In return, the government rewards you with a 25 per cent bonus – so up to £1,000 per year. Your contributions to a Lisa count toward your overall £20,000 annual Isa allowance.
Better still, you can keep paying into your Lisa and receiving the bonus until you turn 50.
The bonus is added to your account every month to give your Savings a regular boost
You can receive the same bonus whether you open a Stocks and Shares Lisa or the cash version
Stocks and shares tend to deliver better returns over longer time periods
But here's the fine print: Your Lisa savings can only be used without penalty in three circumstances:
To buy your first home (up to £450,000)
After you turn 60
If you're terminally ill
If you withdraw the money for any other reason, you'll be hit with a 25 per cent penalty - and that doesn't just eat up your bonus, it also erodes your savings too.
For example, if you put £4,000 into a Lisa, this would have been boosted to £5,000 thanks to the government bonus. But if you withdrew the £5,000 outside the rules, you would get hit with a £1,250 penalty (25 per cent) - losing both the £1,000 government bonus and £250 of your own money.
Who is a Lisa best for?
A Lisa works best for two types of savers: either first-time buyers planning to buy a property, or long-term savers who are happy to lock away their money until they hit 60.
If you're confident you'll use your Lisa savings for either of these purposes, the bonus gives you a 25 per cent return on your money, irrespective of any earnings from interest or investment growth.
And, if you're a couple and as long as you're both first-time buyers, you can each use a Lisa to boost your savings. That means there's up to £2,000 of free government money up for grabs each year.
But if you think you might need to access these savings early – or your property budget is likely to exceed the £450,000 cap – you may want to consider investing in a regular ISA instead.
Lisa considerations
The average house price in the UK in February 2025 was £268,000 - comfortably below the Lisa cap of £450,000. However, there are significant regional disparities.
In England, the average is £292,000, compared to £207,000 in Wales, £186,000 in Scotland and £183,000 in Northern Ireland. But in London, the average is £555,625, well above the Lisa cap and more than three times higher than the average for the North East, £160,452.
Using your Lisa savings to buy a home which costs more than £450,000 will land you with the 25 per cent penalty.
How to make the most of a Lisa
If you decide a Lisa is right for you, here's how to get the best out of it.
Start as early as you can. Opening a Lisa at 18 gives you up to 32 years to benefit from the bonus – even if you only use it to save for retirement. But even if you start at 30, you could still get up to £20,000 in free money. And if you're saving for a home, just three to five years of contributions could give your deposit a healthy boost.
Know what you're saving for. If you plan to buy a home in the next few years, a cash Lisa might be the safer option, as you won't risk losing money if the market drops. If you're saving for retirement and have decades ahead, a stocks and shares Lisa could offer more growth over time.
Combine it with other accounts. You can still use your full £20,000 annual Isa allowance alongside the Lisa. For example, save £4,000 in a Lisa and you'll still have an annual tax-free allowance of £16,000 in a cash or investment Isa.
Avoid dipping in early. The 25 per cent penalty means you'll get back less than you put in if you don't follow the rules. Only open a Lisa if you're sure you can commit.
Where can you open a Lisa?
Lisas aren't offered by every bank or provider, but there are still some good options out there.
The likes of Moneybox, investor platform AJ Bell, their Dodl app for newer investors, Nutmeg who offer a managed investment Lisa and the more established names like Hargreaves Landsdown or Skipton Building Society all offer different types of these accounts.
Ultimately, if you're under 40 and have a clear goal, opening a Lisa is one of the best ways to boost your savings – but only if you use it exactly as intended. Otherwise, you may do better considering other tax-free opportunities.
When investing, your capital is at risk and you may get back less than invested. Past performance doesn't guarantee future results.