The UK government offers savings products with a 25% bonus to help first-time buyers build a deposit. The Lifetime ISA (LISA) is the main product currently available for new savers, while the older Help to Buy ISA closed to new applicants in November 2019 but existing holders can continue contributing. This guide explains how both products work, their key differences, and the rules you need to know.
Lifetime ISA (LISA)
The Lifetime ISA was introduced in April 2017 and is available to anyone aged 18 to 39 (you must open it before your 40th birthday, but can continue contributing until age 50). It is designed for two purposes: saving for your first home, or saving for retirement.
- Annual limit: You can save up to £4,000 per tax year into a LISA (this counts towards your overall £20,000 ISA allowance)
- Government bonus: 25% bonus on contributions, up to £1,000 per year. The bonus is paid monthly, directly into your LISA.
- Property price limit: The property you buy must cost £450,000 or less
- First home: You must be a first-time buyer and buy with a mortgage (not cash)
- 12-month rule: You must have held the LISA for at least 12 months before using it for a property purchase
The 25% Early Withdrawal Penalty
If you withdraw from a LISA for any reason other than buying your first home (under £450,000) or after age 60, a 25% penalty is applied to the withdrawal amount. This is not simply the removal of the bonus — it actually results in you losing more than the bonus you received.
How the 25% Penalty Works
If you save £1,000 and receive a £250 bonus, your LISA holds £1,250. If you withdraw early, the 25% penalty is applied to £1,250 = £312.50 deducted. You receive £937.50 — meaning you have lost £62.50 of your own money, not just the bonus. This makes early withdrawal genuinely punitive.
Help to Buy ISA
The Help to Buy ISA closed to new applicants on 30 November 2019. However, existing holders can continue to save into their accounts until 30 November 2029, and must claim their bonus by 1 December 2030.
- Contributions: Up to £200 per month (initial deposit of up to £1,200 was allowed when opening)
- Government bonus: 25% on savings up to £12,000 = maximum bonus of £3,000
- Property price limit: £250,000 (or £450,000 in London)
- Bonus claimed at completion: Unlike the LISA, the Help to Buy ISA bonus is not available during the saving period — it is claimed through your conveyancer at the point of property completion
An important practical consequence of the bonus being claimed at completion: the Help to Buy ISA bonus cannot count towards your exchange deposit (typically 5-10% paid at exchange of contracts). You need to have enough savings for the exchange deposit without the bonus.
LISA vs Help to Buy ISA Comparison
Side-by-Side Comparison
| Feature | Lifetime ISA | Help to Buy ISA |
|---|---|---|
| Status | Open to new applicants | Closed to new applicants (Nov 2019) |
| Annual contribution | £4,000 | £2,400 (£200/month) |
| Max bonus per year | £1,000 | £600 |
| Lifetime max bonus | £33,000 (age 18-50) | £3,000 |
| Property price limit | £450,000 (UK-wide) | £250,000 / £450,000 London |
| When bonus is available | Paid monthly into account | Claimed at completion |
| Early withdrawal penalty | 25% (lose more than bonus) | None (just lose the bonus) |
| Can use for retirement | Yes (access at 60) | No (property purchase only) |
Using a LISA for Retirement
The LISA has a second purpose beyond helping you buy a first home: saving for retirement. You can withdraw from a LISA penalty-free from age 60 (compared to pension access from age 55/57). The 25% government bonus means that every £4,000 you save becomes £5,000.
However, there are important differences between a LISA and a pension for retirement saving. A pension offers tax relief at your marginal rate (20%, 40%, or 45%), employer contributions, and salary sacrifice benefits. A LISA offers a flat 25% bonus regardless of your tax rate. For basic-rate taxpayers, the effect is similar; for higher-rate taxpayers, a pension is typically more tax-efficient. A LISA also lacks employer matching contributions, which represent "free money" that should generally not be foregone.
LISA vs Pension for First-Time Buyers
Some first-time buyers face a choice between prioritising pension contributions and saving into a LISA. Contributing enough to a workplace pension to receive the full employer match maximises the employer's contribution before any money is directed elsewhere. After that, a LISA can be a useful additional savings vehicle for your deposit, thanks to the 25% bonus and the ability to invest in stocks and shares for potentially higher returns over a multi-year saving period.
Cash LISA vs Stocks and Shares LISA
LISAs come in two forms:
- Cash LISA: Your money earns interest at a fixed or variable rate. Capital is secure. Best if you plan to buy within 1-2 years.
- Stocks and Shares LISA: Your money is invested in funds. Potential for higher returns but your capital can go down as well as up. Better suited to a longer time horizon (3+ years) or for retirement saving.
For more on the broader ISA landscape, see our ISA guide. If you are buying your first home, our first-time buyer mortgage guide covers the full buying process. For comparing pensions and ISAs as long-term savings vehicles, see pension vs ISA.
This guide is for general information only and does not constitute financial advice. The information is based on publicly available data from the FCA, HMRC, and other government sources. Always seek professional advice before making financial decisions. Figures and thresholds are subject to change — check official sources for the latest values.