Lifetime ISA Explained: The 25% Bonus, the Rules, and the Penalty Trap

The Lifetime ISA (LISA) lets you save up to £4,000 per year and receive a 25% government bonus on every pound you put in, up to £1,000 free money each year. That £4,000 sits inside your overall £20,000 ISA allowance, so it does not get its own separate pot.

You can open a LISA if you are aged 18 to 39, and you can keep contributing until age 50. There are only two purposes the money can be used for: buying your first home (property must cost no more than £450,000) or retirement (you can withdraw from age 60 without penalty).

The catch that trips people up

If you withdraw for any other reason, HMRC takes back the bonus and charges a 25% withdrawal penalty on the total balance, including the bonus itself. Because the penalty applies to the full pot rather than just your original contributions, the net effect is that you lose 6.25% of your own money, not just the bonus. Put in £4,000, earn a £1,000 bonus, then withdraw for another reason, and you walk away with £3,750.

That makes the LISA a poor choice for money you might need in an emergency, or for any goal other than a first home or retirement income from 60. Only open one if you are confident you will use it for one of those two purposes.

For a first-time buyer, the LISA pays a 25% return on up to £4,000 a year, which few other accounts match. For retirement, the comparison with a workplace pension is more nuanced: if your employer contributes to your pension, the employer match usually beats the LISA bonus, so fill that first.