Lifetime ISA (LISA) Explained

Written by Fraser Stewart
Reading time 5 minutes
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Disclaimer: The value of your investments can go down as well as up, and you may not get back the full amount you invested. This information is not financial advice. Please consult with a financial adviser before making any investment decisions.

Are you dreaming of owning your first home or planning for a comfortable retirement? A Lifetime ISA (LISA) could be your secret weapon, offering a generous government bonus and tax-free growth to supercharge your savings. But is it right for you? This guide will answer all your burning questions about LISAs, helping you make an informed decision.

If you're new to ISAs, read our comprehensive ISA Guide to learn about all the different types and find the best one for you.

What is a Lifetime ISA?

A Lifetime ISA (LISA) is a unique type of ISA designed to help people under 40 save for their first home or retirement. It's a government-backed scheme that offers a generous 25% bonus on your savings, up to £1,000 per year. Plus, your investments grow tax-free, just like in a Stocks & Shares ISA.

Why Choose a LISA?

LISAs offer a compelling combination of benefits:

LISAs are ideal for two groups of people:

How Much Can I Save in a LISA?

For the 2024/25 tax year, you can save up to £4,000 in a LISA. This is part of your overall annual ISA allowance of £20,000, so you can also save into other types of ISAs if you wish. You can make contributions to your LISA until you turn 50.

How LISAs Work

To open a LISA, you need to be:

You can choose between two types of LISAs:

You receive a 25% government bonus on your savings each year. For example, if you save £4,000, you'll receive a £1,000 bonus. The maximum bonus you can receive in a year is £1,000, even if you save more than £4,000.

Withdrawals

You can withdraw from your LISA without penalty in the following circumstances:

Tax Treatment

LISA investments grow tax-free, just like in a Stocks & Shares ISA. This means you won't pay any capital gains tax on your profits or income tax on any dividends you receive.

Using Your LISA for a First Home

A LISA can be a real game-changer for first-time buyers. Here's how it works:

What if the purchase falls through? If your purchase falls through, you can usually replace the money back into your LISA without losing the bonus, as long as it's within the same tax year.

Using Your LISA for Retirement

If you're not planning to buy a house, you can use your LISA as a powerful tool for retirement saving. Here's how:

Choosing the Best LISA

Finding the best LISA depends on your personal circumstances and goals:

LISA Tips & Strategies

Here are some tips to help you make the most of your LISA:

Risks & Considerations

LISAs come with some risks:

Alternatives to LISAs

If a LISA isn't suitable for you, here are some alternatives:

Other ISAs: Cash ISAs, Stocks & Shares ISAs, and Innovative Finance ISAs offer different ways to save and invest tax-efficiently.

FAQ

Here are answers to some of the most frequently asked questions about LISAs:

Conclusion

A Lifetime ISA can be a valuable tool for first-time homebuyers and retirement savers alike. The 25% government bonus and tax-free growth make it an attractive option for anyone looking to boost their savings. However, it's essential to consider the eligibility criteria, withdrawal rules, and potential risks before deciding if a LISA is right for you.

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