Open a Lifetime ISA the month you turn 22, put in £4,000 a year without fail, and by the time you're 26 the government has handed you £4,000 you didn't have before — on top of the £16,000 you saved yourself. That's the pitch, and for a lot of first-time buyers it's genuinely the best deal going. But the scheme has sharp edges that don't show up in the marketing copy, and the older Help to Buy ISA — still held by hundreds of thousands of people who opened one before it closed to new savers — comes with a completely different set of rules that regularly trip people up when they finally get to exchange.
What a Lifetime ISA actually does
A Lifetime ISA, or LISA, is an account you can open between your 18th and 40th birthday, and you can keep paying into it until you turn 50. You can put in up to £4,000 a year — that limit sits inside your overall £20,000 annual ISA allowance, so if you max out a LISA you've got £16,000 of headroom left for a cash ISA, stocks and shares ISA, or both. Whatever you pay in, the government adds 25% on top, up to a maximum bonus of £1,000 a year. Skipton Building Society runs the biggest cash LISA on the market; Moneybox and AJ Bell dominate the stocks-and-shares version, where your money sits in a fund rather than earning flat interest. The bonus is added monthly at Moneybox and most stocks-and-shares providers, and annually at Skipton — a distinction that matters more than it sounds, because money that's already earned its bonus starts compounding sooner.
You can use a LISA for one of exactly two things: buying your first home, or as a retirement pot you can't touch penalty-free until 60. There's no third option. If you're saving for a wedding, a car, or simply want access to the cash in three years for something unrelated to property, a LISA is the wrong tool, whatever the 25% bonus looks like on paper.
The £450,000 cap nobody's updated since 2017
Here's the catch that catches out buyers in London and the South East specifically: the property you buy with LISA funds has to cost £450,000 or less. That ceiling was set when the scheme launched in April 2017 and it has never moved, despite average first-time buyer prices in large parts of London sitting comfortably above it. A couple who've each maxed out a LISA for four years, sitting on a combined £40,000 of savings plus bonus, can still find themselves priced out of using any of it if the flat they want is £460,000 — the account doesn't part-apply, it simply won't release funds for a purchase over the limit at all. Outside London and the commuter belt, £450,000 covers most first-time purchases without issue. Terraced houses in Leeds, Cardiff, or Newcastle rarely test that ceiling. It's a regional problem more than a universal one, but if you're saving in or near London, check current asking prices in your target area before you commit four years of contributions to an account with a fixed cap that inflation keeps eroding.
Help to Buy ISA: closed to new savers, still very much alive for existing ones
Help to Buy ISAs stopped accepting new applicants on 30 November 2019, so if you don't already have one, you can't open one now — full stop, no exceptions, no workaround through a different bank. But a large number of people who opened one before that cut-off are still paying in, and the scheme's actual end dates are further out than most holders realise: you can keep contributing until 30 November 2029, and you've got until 30 November 2030 to claim the government bonus on whatever you've saved. The mechanics differ from a LISA in ways that matter. You can pay in a maximum of £200 a month (with an extra £1,200 allowed in the very first month), the bonus is 25% up to a cap of £3,000 on £12,000 saved, and — unlike the LISA's single £450,000 limit — the property price cap is £250,000 outside London and £450,000 inside it. The bonus also isn't paid into the account as you go; it's claimed by your solicitor at completion, applied directly to the purchase rather than sitting in your account earning interest beforehand.
If you're one of the people still holding a Help to Buy ISA, don't assume you have to choose between it and a LISA. You can hold both, though you can only use the government bonus from one of them towards the same property purchase — most advisers I'd trust on this would tell you to run the LISA as your primary vehicle once you're eligible, since £4,000 a year comfortably outpaces £2,400, and use the Help to Buy ISA balance as extra deposit money without claiming its bonus twice over.
The 25% withdrawal penalty is not what people think it is
This is where LISA holders get caught out. If you withdraw money from a Lifetime ISA for any reason other than a first home purchase, turning 60, or a terminal illness diagnosis, the government charges a 25% withdrawal penalty on the whole amount you take out — not just the bonus. Say what that means with real numbers: you paid in £4,000, the government added £1,000, giving you £5,000. Withdraw it early for an unrelated reason and the 25% charge takes £1,250, leaving you with £3,750 — £250 less than you actually put in yourself. You don't just lose the bonus; you lose a slice of your own capital too, because 25% of the enlarged pot is bigger than the 25% top-up that created it in the first place. That's a genuinely punitive mechanism, and it's exactly why financial advisers tell younger savers not to treat a LISA as a general emergency fund with a nice bonus attached. Keep separate, accessible savings for anything unpredictable — a car repair, a job gap, a broken boiler — and leave the LISA untouched for the one purpose it's built for.
A worked example
Take someone who opens a Lifetime ISA at 23 and saves the full £4,000 every year for four years, buying at 27:
- Total personal contributions: £16,000
- Government bonus at 25%: £4,000
- Balance available towards a deposit, before any interest or investment growth: £20,000
- If it's a stocks-and-shares LISA invested through the four years and markets behave reasonably, that £20,000 could realistically sit somewhere higher — though returns aren't guaranteed the way the government bonus is, and a bad final year before completion can cut the other way too
Compare that with putting the same £4,000 a year into an ordinary easy-access savings account paying, say, 4% interest — a realistic top rate from a challenger bank in 2026. Over four years that gets you to roughly £17,000, nowhere near the £20,000-plus the LISA route delivers. The bonus alone is worth more than a full year of decent interest on the whole pot.
Who this actually suits
A LISA makes sense if you're under 40, reasonably confident you'll buy within the £450,000 cap, and can commit to leaving the money alone until completion. It's a weaker fit if your timeline is uncertain, if you're eyeing a property near or above the cap in London, or if you might need to dip into the savings for something else — the 25% clawback makes that an expensive mistake, not a minor inconvenience. If you're buying with a partner, both of you can hold your own LISA and both bonuses count towards the same deposit, effectively doubling the government's contribution on a joint purchase. That's the single strongest reason to start one now rather than wait: two people saving £4,000 a year each for three years puts £6,000 of free government money on the table, money that a joint mortgage application will treat exactly the same as savings you earned yourselves.