What is a Lifetime ISA? How it works, best providers and penalties
Here we look at how Lifetime ISAs work, the pro’s and cons, how to get a Lifetime ISA.
What is a Lifetime ISA?
A Lifetime ISA (LISA) is a Government-backed savings account designed to help people save for their first home or retirement.
Available to UK residents aged 18 to 39, it allows savers to deposit up to £4,000 per tax year, with the Government adding a 25% bonus (up to £1,000 per year).
Key features of a Lifetime ISA:
- Save up to £4,000 per year
- Receive a 25% government bonus (max £1,000 annually)
- Use funds for a first-time property purchase or retirement savings
- Tax-free growth on savings
- Strict withdrawal rules (with penalties for early access)
A Lifetime ISA can be a powerful tool for first-time buyers and long-term savers, particularly the self-employed who don’t benefit from a workplace pension scheme.
However, it’s not ideal if you need early access to your money, and probably not worth it financially if you’re using it instead of a workplace pension scheme that is contributing to your savings more than the Government bonus on a Lifetime ISA.
Best for: First-time buyers, self-employed savers
Avoid if: You may need the money before 60 (and don’t plan to buy a house)
Key takeaway: If you fit the eligibility criteria, a Lifetime ISA can give you up to £33,000 in free Government bonuses over its lifetime.
How does a Lifetime ISA work?
When you contribute to a Lisa, the Government adds a 25% bonus to your savings, usually paid monthly. You can invest in either:
- Cash Lifetime ISA – Works like a savings account, earning interest
- Stocks and shares Lifetime ISA – Invests in funds and stocks (potentially higher returns, but with risk)
To use your Lifetime ISA for a property purchase, you must:
- Be a first-time buyer
- Purchase a home worth £450,000 or less
- Buy with a residential mortgage
- Have had the account open for at least 12 months
For retirement savings, funds can be withdrawn tax-free from age 60. Any earlier withdrawals not for a first home incur a 25% penalty (detailed below).
How to open a Lifetime ISA
To open a Lifetime ISA, you must be:
- A UK resident
- Aged between 18-39
- Opening with a provider offering cash or stocks and shares LISAs
Steps to open a Lifetime ISA:
- Choose a provider – Popular options include Moneybox, Hargreaves Lansdown, AJ Bell, and Skipton Building Society.
- Decide between cash or stocks & shares ISAs.
- Complete the application (usually online via the provider’s website or app).
- Set up contributions – Make one-off deposits or set up regular payments.
Lifetime ISA providers
There are a number of Lifetime ISA providers, offering as much as 5% at the time of writing this article in March 2025.
| LISA Providers | Account Type | Interest Rate (AER) |
|---|---|---|
| Moneybox | Cash LISA | 5.00% (includes 1.20% bonus for 12 months, reducing to 3.80% thereafter) |
| AJ Bell Dodl | Cash LISA | 4.84% |
| Tembo | Cash LISA | 4.55% |
| Paragon Bank | Cash LISA | 3.51% |
| Skipton Building Society | Cash LISA | 2.80% |
| Newcastle Building Society | Cash LISA | 2.70% |
| Hargreaves Lansdown | Stocks & Shares LISA | N/A (investment-based returns) |
| AJ Bell | Stocks & Shares LISA | N/A (investment-based returns) |
| Nutmeg | Stocks & Shares LISA | N/A (investment-based returns) |
| Fidelity | Stocks & Shares LISA | N/A (investment-based returns) |
| Interactive Investor | Stocks & Shares LISA | N/A (investment-based returns) |
Moneybox is the most searched provider. Others do not market their products as widely, despite rising popularity among consumers, for several reasons, one of which is they see the 18-39-year-old market as too small. Another issue is over fears of a ‘misselling scandal’ due to the confusion over the 25% fee for withdrawing early and the house price limit of £450,000.
Martin Lewis said: "You have a succession of young people who are saving in the vehicle they have been encouraged by the state, who are then trying to use their savings to buy a first-time property, but due to house price inflation, that property has just tripped above the £450k level and not only do they not get the £1,000 a year bonus they were intended to get... they are fined by the State effectively 6.2% of their own money to withdraw that money to get the cash out."
However, as mentioned, Lisas are rising in popularity. An estimated 755,000 people paid into a Lisa in the 2022-23 tax year, up 10%, and investing £1.87 billion, up by 10 per cent.
Moneybox saw a 38 per cent increase in new Lisa account openings last year, saying they appeal especially to low and middle earners.
Lifetime ISA for self employed
If you’re self-employed, you can open a Lifetime ISA and contribute up to £4,000 per year. You’ll receive the 25% Government bonus, just like those saving for their first home, making it a great tax-efficient way to save for retirement.
Unlike workplace pensions, which require employer contributions, self-employed individuals don’t get auto-enrolled into a pension scheme—so a Lisa can be a useful alternative.
Benefits of a Lifetime ISA for the self-employed:
- 25% Government bonus – For every £4,000 saved, the government adds £1,000, boosting your retirement fund.
- Tax-free growth – Like a pension, investments in a LISA grow tax-free.
- Flexibility – Unlike pensions, a LISA can also be used for a first home purchase, giving you dual benefits.
- No Income Tax on withdrawals – Unlike pensions, LISA withdrawals after age 60 are tax-free.
- No employer? No problem – Self-employed individuals don’t get employer pension contributions, so a LISA offers a government boost instead.
Cons of a Lifetime ISA for the self-employed:
- You can’t access the money before 60 without a penalty (unless buying a first home).
- The £4,000 LISA limit counts toward your £20,000 annual ISA allowance.
- No tax relief on contributions, unlike a pension.
| Feature | Lifetime ISA | Pension (SIPP / Personal Pension) |
|---|---|---|
| Government Bonus | 25% (on up to £4,000 per year) | 20-45% tax relief (based on income tax bracket) |
| Annual Contribution Limit | £4,000 (within £20,000 ISA limit) | £60,000 (or 100% of earnings, whichever is lower) |
| Tax Treatment on Contributions | No tax relief | Tax relief on contributions (20-45%) |
| Withdrawal Age | 60 (penalty for early withdrawal) | 55 (increasing to 57 by 2028) |
| Withdrawal Tax | Tax-free at 60 | 25% tax-free, rest taxed as income |
| Use for First Home | Yes (max £450,000 property) | No |
| Inheritance Benefits | Can be inherited tax-free | Subject to inheritance tax rules |
| Flexibility | Can only be withdrawn for a house or at 60 | More withdrawal options (annuity, drawdown) |
Which is better for the self-employed?
For retirement: A pension is better for most higher earners due to tax relief on contributions.
For first-time buyers: A Lifetime ISA is better if you’re planning to buy a home.
For tax-free retirement income: A LISA is tax-free after 60, whereas a pension is partially taxed.
Best Strategy? Use Both!
If you’re self-employed, a mix of both a Lifetime ISA and a pension can be a smart approach.
You could use a pension for larger contributions (especially if you’re a higher-rate taxpayer and benefit from 40% tax relief).
You could use a Lisa for tax-free withdrawals at 60 and the 25% government boost.
A Lifetime ISA can be a great additional savings tool for the self-employed, but for maximum retirement benefits, a pension may be more tax-efficient—especially for higher earners.
HMRC Lifetime ISA withdrawal penalties
The Lifetime ISA has strict withdrawal rules, and accessing funds early (for reasons other than buying a first home or retiring at 60) results in a 25% penalty.
For example:
You save £1,000.
The government adds £250 (25% bonus), so your total becomes £1,250.
If you withdraw early, the 25% penalty applies to the full £1,250:
£1,250 × 25% = £312.50 penalty
- After the penalty, you receive:
£1,250 - £312.50 = £937.50
So, if you originally saved £1,000, but only get back £937.50, you have lost £62.50 of your own money—which is 6.25% of your original £1,000 savings.
There is an exception where no penalty applies if you withdraw due to a terminal illness. You can also withdraw in full if the ISA holder dies. The Lisa ends on the date someone dies.
Is a Lifetime ISA worth it?
A Lifetime ISA can be highly beneficial if:
- You are a first-time buyer and plan to use it for a home purchase.
- You want long-term retirement savings with a 25% government boost.
However, a Lisa isn’t for everyone and may not be worth it if:
- You might need access to the money before age 60 (and aren't buying a home), the 25% penalty could be costly.
- You want to save more than £4,000 a year.
- You are getting more in company contributions on a workplace pension than the Government gives.
Here are a few scenarios comparing workplace pensions with Lifetime ISAs, and also showing how much a self-employed person can get from the Government based on their contributions.
| Scenario | Savings Option | Your Contribution | Employer Contribution | Government Bonus / Tax Relief | Total Received | Tax on Withdrawals? |
|---|---|---|---|---|---|---|
| Basic-Rate Taxpayer (20%) with Employer Match | Workplace Pension | £1,500 | £1,500 | £300 (20% tax relief) | £3,300 | 75% taxable, 25% tax-free |
| Basic-Rate Taxpayer (20%) with Employer Match | Lifetime ISA | £1,500 | £0 | £375 (25% LISA bonus) | £1,875 | Tax-free (if used for home or at 60) |
| Higher-Rate Taxpayer (40%) with Employer Match | Workplace Pension | £3,000 | £3,000 | £1,200 (40% tax relief) | £7,200 | 75% taxable, 25% tax-free |
| Higher-Rate Taxpayer (40%) with Employer Match | Lifetime ISA | £3,000 | £0 | £750 (25% LISA bonus) | £3,750 | Tax-free (if used for home or at 60) |
| Self-Employed (Investing £1,500 in a LISA) | Lifetime ISA | £1,500 | £0 | £375 (25% LISA bonus) | £1,875 | Tax-free (if used for home or at 60) |
| Self-Employed (Investing £3,000 in a LISA) | Lifetime ISA | £3,000 | £0 | £750 (25% LISA bonus) | £3,750 | Tax-free (if used for home or at 60) |
What does Martin Lewis say about Lifetime ISAs?
Martin Lewis, the founder of MoneySavingExpert, says a Lisa is better than a Help to Buy ISA (which closed in 2019) and is a great choice for first-time buyers, but only if your house price is under £450,000.
He says the withdrawal penalty is misleading because it takes some of your own money too.
He also believes the £450,000 house price limit should be raised to take into account the cost of property in the south of England.
He said: "Young savers should not be essentially fined – and lose their hard-saved cash – when they purchase homes above the scheme's £450,000 limit."
He added: "The simple solutions are to index-link the £450,000 limit to house prices (backdated to 2018) and to reduce the withdrawal penalty for those buying a first-time property above the limit to 20%."
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