CEO, The Savvy Investor Limited · Investment Educator
Updated: 28 October 2026 · Reading time: 9 minutes
What’s changed: Updated 28 October 2026: the Budget cut the charge for buying a first home above £450,000 to 20% from 29 October, set April 2029 for the First Time Buyer ISA that replaces the LISA for new savers, and kept the cash ISA limit at £20,000. Earlier, 24 June: the First Time Buyer ISA consultation. Full update history.
⚠️ Important: This article provides educational information for UK residents and is not personalised financial advice. Whether a Lifetime ISA suits you depends on your age, goals, employment, and tax position. ISA and pension rules are based on current 2026/27 legislation and may change. Consider speaking to an FCA-authorised adviser before deciding.
The Lifetime ISA, or LISA, is the only ISA that pays you to save. Put in up to £4,000 a year and the government adds a 25% bonus, up to £1,000 annually, towards either your first home or your retirement. For the right saver it is close to free money. For the wrong one, the 25% withdrawal penalty quietly takes back more than the bonus ever gave. This guide explains both sides in full for 2026.
The short version
- Contribute up to £4,000 a year, which counts within your overall £20,000 ISA allowance.
- The government adds a 25% bonus, up to £1,000 a year, paid monthly.
- You must open it between ages 18 and 39, and you can keep paying in (and earning the bonus) until age 50.
- Two penalty-free uses: a first home up to £450,000, or retirement from age 60.
- Any other withdrawal triggers a 25% charge that costs you 6.25% of your own money on top of losing the bonus.
- From 29 October 2026, using a LISA to buy a first home above £450,000 carries a 20% charge instead, which the government says is set to recover the bonus while you keep your own contributions.
- The £450,000 cap has not moved since 2017, which increasingly shuts out London and the South East, and the government has decided to leave it there.
- The LISA is closing to new savers: a First Time Buyer ISA replaces it from April 2029. If you already hold one, the current rules carry on.
- For most employed and higher-rate taxpayers, a pension usually beats a LISA for retirement; for basic-rate self-employed savers and first-time buyers, the LISA shines.
How the Lifetime ISA works
A LISA is a tax-free wrapper, like any ISA, so your growth and withdrawals are free of UK income tax and capital gains tax. What makes it special is the bonus. Pay in £4,000 in a tax year and the government tops it up with £1,000, giving you £5,000 working for you. Over the years from 18 to 50, that is a potential £33,000 of free bonuses if you max it every year.
You can hold a Cash LISA (like a savings account) or a Stocks and Shares LISA (invested). For a house purchase within a few years, cash makes sense. For retirement decades away, an invested LISA holding low-cost funds gives your money the chance to grow. Our guide to index funds versus actively managed funds covers what to hold.
Using a LISA for a first home
This is where the LISA is at its strongest. To use it penalty-free for a property purchase:
- It must be your first home (you have never owned property anywhere in the world).
- The purchase price must be £450,000 or less. Above that, a 20% charge applies from 29 October 2026 (see below).
- You must buy with a mortgage (not an outright cash purchase).
- The LISA must have been open at least 12 months before you use it.
Two first-time buyers each with a LISA can combine bonuses on the same property, a meaningful boost towards a deposit. The 12-month rule is the one that catches people: if you are within a year of buying, open a LISA now (even with £1) just to start the clock.
The penalty trap explained
The 25% withdrawal charge on non-qualifying withdrawals is the LISA’s sharpest edge, and it is widely misunderstood. People assume it just claws back the 25% bonus. It does not. Because the charge is 25% of the total (your money plus the bonus), you lose more than the bonus.
⚠️ How the penalty actually works
You deposit £4,000. The government adds £1,000. You now hold £5,000.
- You withdraw it for a non-qualifying reason.
- 25% charge on £5,000 = £1,250.
- You receive £3,750.
- You have lost £250 of your own money, on top of the bonus.
The effective hit is 6.25% of what you put in. Only use a LISA if you are confident the money is for a qualifying first home or for retirement from 60.
One exception now applies. From midnight on 29 October 2026, buy a first home that costs more than £450,000 but passes the other tests and the charge drops to 20%. The government says this “will recover the government bonus while allowing savers to retain their own contributions.” On the same £5,000, 20% comes to £1,000, which is the bonus and nothing more, so the £4,000 you paid in comes back to you. Take the money out for any other reason and the full 25% charge still applies.
The £450,000 cap problem
The property price cap has been frozen at £450,000 since the LISA launched in 2017, while house prices have risen substantially. In London and much of the South East, that cap now excludes many ordinary first homes. The Treasury Select Committee has called the cap “not fit for purpose.” Before 29 October 2026, buying at £455,000 meant the full 25% charge, which took some of your own money along with the bonus. From that date the charge on a first home above the cap is 20%: the bonus goes, but everything you paid in stays yours.
The cap itself stays put. Responding to the First Time Buyer ISA consultation, published alongside the Budget on 28 October 2026, the government weighed calls to raise, index, regionalise or remove it and kept it, saying the cap “remains an important feature of the Lifetime ISA”. So £450,000 remains the limit for the LISA, and it will apply to the replacement too.
LISA vs pension for retirement
For retirement saving specifically, the LISA competes with pensions, and the answer depends on your circumstances.
| Feature | Lifetime ISA | Pension (SIPP / workplace) |
|---|---|---|
| Government top-up | 25% bonus | 20% to 45% tax relief (up to 60% at £100k to £125,140) |
| Annual limit | £4,000 | £60,000 (or 100% of earnings) |
| Access age | 60 (or first home) | 55, rising to 57 in 2028 |
| Withdrawals | Tax-free | 25% tax-free, rest taxed as income |
| Employer contributions | No | Often yes (free money) |
| Counts for means-tested benefits | Yes (it is savings) | Generally no while preserved |
The rule of thumb, as Martin Lewis puts it, is that a pension will usually beat a LISA for retirement for anyone who is employed (especially with employer matching) or who pays higher or additional-rate tax, because the tax relief and employer contributions outweigh the 25% bonus. The LISA wins for basic-rate self-employed savers with no workplace pension (the 25% bonus matches 20% tax relief, and withdrawals are fully tax-free), and as a first-home vehicle. For the full comparison, see our ISA vs SIPP guide.
Who should open a LISA?
- First-time buyers confident of buying under £450,000 within their plans. The clearest win.
- Basic-rate self-employed savers without a workplace pension, for retirement from 60.
- Younger higher-rate taxpayers who use both: a LISA for a first home, plus a workplace pension for the superior tax relief.
Think twice if there is any real chance you will need the money for something other than a qualifying home or retirement, or if you might buy above £450,000, where from 29 October 2026 the 20% charge is designed to take back the bonus.
Frequently asked questions
Can I open a LISA after 40?
No. You must open one before your 40th birthday. If you open it in time, you can keep contributing and earning the bonus until you turn 50.
Does the LISA bonus count towards my £20,000 ISA allowance?
Your £4,000 contribution counts within the £20,000 limit, but the £1,000 government bonus does not. So you can still pay up to £16,000 into other ISA types in the same year, including cash. The planned cut in the cash ISA limit to £12,000 for under-65s from April 2027 has been dropped. The Budget on 28 October 2026 kept the cash ISA limit at £20,000 for all savers over 18, with the change to be made by regulations laid before Parliament in November 2026.
What happens to my LISA at age 60?
From age 60 you can withdraw the whole balance, including all bonuses and growth, completely tax-free and with no charge, for any purpose.
Can I transfer a Help to Buy ISA into a LISA?
Yes, transfers from a Help to Buy ISA are allowed and the transferred amount earns the 25% bonus, though it counts towards your £4,000 LISA limit for the year. Help to Buy ISAs themselves closed to new savers in 2019.
Is the Lifetime ISA being scrapped?
For new savers, yes, from April 2029. The Budget on 28 October 2026 confirmed a First Time Buyer ISA from that date, replacing the LISA for anyone opening an account. The £4,000 a year limit and the 25% bonus stay. The difference is that the bonus is paid on the balance when you withdraw it to buy a first home costing up to £450,000, it is capped at £20,000, and there is no upper age limit. If you already hold a Lifetime ISA, you can keep paying in and using it under the current rules. You will not be able to move a LISA into the new account, though you can put both towards the same purchase. For the detail, see our First Time Buyer ISA explainer and our guide to what the 2026 Budget changes for savers.
Related Savvy Investor guides: 760,000 unclaimed Child Trust Funds: how to find yours.
Weighing a LISA against a pension?
See the full side-by-side before you commit your retirement savings.
Update history: 28 October back to 24 June 2026
Update, 28 October 2026: The Budget changed three things this guide covers, and the article above now reflects them. From midnight on 29 October 2026 the withdrawal charge for buying a first home above the £450,000 cap falls from 25% to 20%; the 25% charge on other withdrawals is unchanged. A First Time Buyer ISA will replace the LISA for new savers from April 2029, with a 25% bonus capped at £20,000 and the £450,000 cap kept. The planned £12,000 cash ISA limit for under-65s will not go ahead. Two points in the June note below are now out of date: the launch is April 2029, not the reported April 2028, and the bonus rate (25%) and the property price cap (£450,000) are confirmed. The June note has moved here from the top of the article and is otherwise unchanged. Sources: Budget 2026, paragraphs 5.8 to 5.9, 6.239 to 6.240 and 6.248; First Time Buyer ISA consultation: government response, paragraphs 2.6 to 2.9.
Update, June 2026: the Lifetime ISA is being replaced
On 23 June 2026 the government published a consultation on a new First Time Buyer ISA that will, in time, be offered in place of the LISA, with a reported launch target of around April 2028. If you already hold a Lifetime ISA, nothing changes for you now: you keep it, keep the bonus, and the rules below still apply. The proposed replacement drops the age-40 limit and the 25% penalty and pays the bonus when you buy, though the bonus rate and the property price cap are not yet confirmed. Our First Time Buyer ISA explainer covers the consultation in full.