Lifetime ISA Explained: Rules, Bonus, and Withdrawal Penalties

The Lifetime ISA was designed to do two jobs at once: help people buy a first home, and help them save for later life. The Treasury Select Committee's 2025 inquiry concluded that this dual purpose is what made it unnecessarily complex, and the government is now consulting on a simpler replacement.

That matters for anyone considering one today, so this guide covers both the rules as they stand and what is coming.

You can pay in up to £4,000 per tax year and the government adds a 25% bonus — up to £1,000 a year. That £4,000 counts towards your overall £20,000 ISA allowance.

Take the money out for anything other than a qualifying first home, reaching age 60, or terminal illness, and a 25% withdrawal charge applies to the whole amount. Because the charge is levied on the bonus-inflated balance, you end up with less than you put in.

The LISA is being replaced by a First Time Buyer ISA. Existing accounts continue under current rules indefinitely.

The age rules are strict and catch people out:

• You must be aged 18 to 39 to open a Lifetime ISA
• Once open, you can keep contributing until you turn 50
• After 50 the account stays open and keeps earning interest or investment returns, but no further contributions or bonuses are added

You must also be a UK resident for tax purposes. If you are 39 and considering one, opening before your fortieth birthday preserves the option even if you contribute very little at first — you cannot open one later.

The government pays 25% on what you contribute, up to £1,000 per tax year on the maximum £4,000.

The bonus is currently paid monthly, claimed by your provider and credited to the account, rather than arriving as a single annual payment. Once in the account it is treated like the rest of the balance: it earns interest or is invested, and it is subject to the same withdrawal rules.

A common misreading: 25% of contributions is not the same as a 25% return. If you pay in £4,000 and receive £1,000, you hold £5,000 — but the bonus is calculated on what you put in, not on the running balance, so it does not compound as a bonus year after year.

The £4,000 annual cap sits inside the overall £20,000 ISA allowance, not on top of it. Paying £4,000 into a LISA leaves £16,000 for other ISA types that year — see how the £20,000 limit works.

Only three circumstances allow you to take money out with no charge:

1. Buying a qualifying first home. The property must cost £450,000 or less, be in the UK, be your intended main residence, and be bought with a mortgage. You must be a genuine first-time buyer, meaning you have never owned property anywhere in the world. The account must also have been open for at least 12 months before you can use it for a purchase. The money goes to your conveyancer, not to you.

2. Reaching age 60. From your sixtieth birthday you can withdraw for any purpose, free of charge and free of tax.

3. Terminal illness. A diagnosis with less than 12 months to live allows a charge-free withdrawal at any age.

Everything else — a car, a wedding, an emergency, a house above the price cap, buying without a mortgage — triggers the charge.

This is the single most misunderstood feature of the product. The charge is 25% of the amount withdrawn, not 25% of the bonus.

Because the withdrawal includes the bonus, taking 25% back off the larger figure removes more than was added:

• You contribute £4,000
• The government adds £1,000, giving £5,000
• You withdraw the lot. The charge is 25% of £5,000 = £1,250
• You receive £3,750 — £250 less than you paid in

That is a 6.25% loss on your own money, before considering any interest or growth. The arithmetic is covered in full in our guide on what the LISA withdrawal penalty actually costs.

Transferring a LISA to another LISA provider is not a withdrawal and does not trigger the charge — see moving a Lifetime ISA between providers.

Both exist and the choice should follow your timescale.

A Cash LISA behaves like a savings account: capital secure, FSCS-protected, interest-paying. Appropriate when you expect to buy within a few years.

A Stocks and Shares LISA invests the money. Over a long horizon — someone in their twenties saving towards age 60 — that has historically produced better returns, but the value can fall, and it is unsuitable for a deposit you need at a fixed near-term date.

You can transfer between the two without losing the bonus, provided it is done as a transfer.

At Budget 2025 the government announced it would consult on a simpler product for first-time buyers. That consultation opened in June 2026 and closes on 18 August 2026.

What is confirmed:

• The new product will be offered in place of the Lifetime ISA once available
• The bonus will be paid when you buy the property, as a lump sum, rather than credited monthly
• Paying the bonus at purchase removes the need for a withdrawal charge, so savers whose circumstances change are not penalised
• You can still open a LISA until the new product arrives, and existing account holders can continue saving under the existing rules indefinitely

What is not yet confirmed: the bonus rate, the annual subscription limit, the property price cap, and the launch date. Those will follow the consultation.

The practical implication is that a LISA opened now is not a stranded asset. But if the reason you would open one is purely the first-home bonus and you are years away from buying, waiting for detail on the replacement is a reasonable position.

Looking for more on this topic? Browse all our savings guides.

This guide is based on UK primary legislation, regulator handbooks, and official guidance. The following sources cover the rules described above:

• Lifetime ISA — GOV.UK
• First Time Buyer ISA consultation — GOV.UK
• Individual Savings Account Regulations 1998
• HM Revenue & Customs
• Treasury Committee — Lifetime ISA reform

Free, impartial money guidance is available from MoneyHelper, the government-backed service run by the Money and Pensions Service.

Related: LISA Withdrawal Penalty Explained | Moving a Lifetime ISA Between Providers | All savings guides.