Understanding Lifetime ISAs: The rules, limits, and how they work 

You can use a Lifetime ISA (LISA) to save money towards your first home or your retirement and the government will give you up to £1,000 per year towards it

Every tax year you can put away up to £4,000, and with the extra government bonus it can be a great way to save.

But there are rules around how you can access the money and the type of property you can buy. We explain here how Lifetime ISAs work so you can decide if they’re right for you or not.  

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What is a Lifetime ISA?

A Lifetime ISA is a savings product that lets you put money away for your first home (worth up to £450,000) or your retirement.

You can put £4,000 into it every tax year and you’ll get a government bonus of 25% on top, giving you an extra £1,000. The money within the ISA also grows as it earns interest or investment returns and this is tax free.

The money within a LISA can only be used for two specific things though: to buy a first property worth up to £450,000 or for your retirement. If you take the money out for any other reason you’ll face a penalty.

You can choose between a cash LISA, which will earn interest, or an investment LISA, which will be invested and should grow (although as with any investment this is never guaranteed). 

We’ve got a full list of the best-paying Cash Lifetime ISAs and the cheapest stocks and shares Lifetime ISAs here.

Who can open a Lifetime ISA?

Any UK resident aged 18 to 39 can open a Lifetime ISA. 

Once you have opened one you can put money into it until you turn 50. After that point you won’t be able to put any more money in but the money already in the account will continue to earn interest and investment returns.

What are the current Lifetime ISA rules?

Lifetime ISAs are slightly confusing as there are rules around who can open one and what the money can be used for, as you can see here. 

What is a first time buyer when it comes to Lifetime ISAs?

You can only open a Lifetime ISA and use the money for a property if you are a first-time buyer. This means someone who has never owned a property before, either in or outside of the UK.

Lifetime ISA house price limit

You can use the money within your LISA to buy a house worth up to £450,000. There have been calls by experts for this limit to be raised, especially for those living in cities like London, but at the moment this is the level it is set at.

How much can you put in a Lifetime ISA?

You can put up to £4,000 into a Lifetime ISA every tax year. The government pays a 25% bonus on anything you put in too. If you put away £2,000 in a tax year, for example, it would add in an extra £500.

When can you withdraw a lifetime ISA? 

If you are using the money in your LISA to buy a first home you can withdraw it any any point, if the account has been open for at least 12 months. If the money is going towards your retirement, you need to wait until you are 60. You may also be able to withdraw the money if you are diagnosed with a terminal illness. 

When is the Lifetime ISA bonus paid?

The government bonus is paid every month and it is based on how much money you put into the account in the previous month.

What is the Lifetime ISA withdrawal penalty?

If you take out money from your Lifetime ISA account before you turn 60 and it’s not for a first property you will be charged a penalty. The penalty is 25% of the total amount you take out. This doesn’t apply if you take your money out because you have a terminal illness or if you die.  

Can I transfer a Lifetime ISA?

Yes, you can transfer money from one Lifetime ISA to another, if the new account has a better rate of interest for example. If you do this, you will need to transfer the full amount of money into the new account, as the rules state you can only have one LISA open per tax year.  

Can I open another ISA at the same time as opening a Lifetime ISA?

Yes, you can open a different type of ISA and a Lifetime ISA in the same tax year. The annual limit is £20,000 and this is the amount you can put into all of your ISAs within a tax year. If you have a Help to Buy ISA, you won’t be able to benefit from the extra government bonus on this and your Lifetime ISA though. 

How do I open a Lifetime ISA? 

It’s relatively quick and easy to open a Lifetime ISA, and how you do it will depend on the provider you choose. You’l usually follow the following steps:

1. Decide if you want to open a cash or investment Lifetime ISA.
2. Compare providers to find an account that pays a competitive rate of interest and a provider you’re happy with.
3. Sign up to open the new account (this could be via an app, online, in person or by phone).
4. Show relevant documents and ID to the provider.
5. It should set up the account and you can start adding money to it.

Lifetime ISAs vs other savings and investment options

A Lifetime ISA is a helpful savings account but it’s not right for everyone, here are some of the main alternatives that you could take out at the same time.

Lifetime ISA vs a regular ISA

If you have an investment or cash LISA this works in a similar way to a regular stocks and shares or cash ISA. However, there is no limit on what you can spend the money on with a standard ISA and you can put more money into one. However, you won’t get the extra government with a regular ISA.

Lifetime ISA vs a pension

While a Lifetime ISA and a pension can be used for your retirement, they both have different pros and cons. A Lifetime ISA, for example, can be accessed from the age of 60 and all withdrawals are tax-free. While a pension can be accessed from 55 (rising to 57 in 2028) and only 25% of your pot is tax free, with the rest taxed as your income.