By clicking a retailer link you consent to third-party cookies that track your onward journey. This enables W? to receive an affiliate commission if you make a purchase, which supports our mission to be the UK's consumer champion.
The lifetime Isa offers a 25% government bonus to help you buy your first home or save for retirement – but misunderstanding the rules could leave you out of pocket.
New research commissioned by HMRC has revealed some of the most common misconceptions about how the product works.
Based on 50 in-depth interviews, the study found confusion over who can open an account, how the withdrawal charge is applied, and what counts as a qualifying property.
The findings come as the Treasury Committee reviews whether lifetime Isas (Lisa) are fit for purpose – with potential reforms including cutting the penalty, raising the house price cap or scrapping the scheme altogether.
Here Which? busts six common myths to help you save with confidence.
By far the most attractive feature of the Lisa is the bonus. Savers can deposit up to £4,000 per year and receive a generous 25% contribution from the government.
This means if you save the maximum amount possible per year from the age of 18 to 50, you could receive £32,000 in bonuses, plus any interest you earn from your provider.
However, this comes with conditions – money saved in a Lisa can only be used to buy your first home or once you turn 60. If you remove your savings for any other reason, you’ll be hit with a 25% withdrawal charge.
Very few of those interviewed by Ipsos, who conducted the research on behalf of HMRC, understood that the withdrawal charge doesn’t just remove the government bonus – it actually leaves you with less money than you originally put in.
That’s because the 25% charge is applied to the whole pot, including the bonus. So if you save £4,000 and get a £1,000 bonus, then withdraw early, you’ll pay 25% of £5,000 – leaving you with just £3,750. That’s a £250 loss on your original savings.
Some savers assume the Lisa house price limit varies by region – but it doesn’t.
If you use a Lisa to buy your first home, the property must be in the UK and cost £450,000 or less. The cap is fixed and applies nationwide, whether you’re buying in London or Lancashire.
Even some Lisa holders interviewed believed the limit was higher in the capital or South East – but that’s not the case.
The cap hasn’t changed since the scheme launched in 2017. And with house prices rising, it’s becoming more of a barrier – Skipton Building Society recently forecast that by 2027, average first-time buyer prices will exceed £450,000 in 12% of local authorities in England.
Find the right mortgage using the fee-free service provided by L&C Mortgages
Compare mortgagesIf you click on the link and complete a mortgage with L&C Mortgages, L&C is paid a commission by the lender and will share part of this fee with Which? Ltd helping fund our not-for-profit mission. We do not allow this relationship to affect our editorial independence. Your home or property may be repossessed if you do not keep up repayments on your mortgage.
A Lisa must be open for at least 12 months before you can use it to buy your first home.
Some first-time buyers interviewed in the research hadn’t realised this – and ended up unable to access their savings when they needed them.
Any withdrawals made in the first year, even if the money is going towards a house purchase, will trigger the 25% charge.
If you're planning to use a Lisa for a property deposit, make sure you open an account at least a year before you expect to buy.
Some Lisa holders interviewed weren’t aware of how the bonus payments worked, and expressed a strong desire for them to be paid monthly.
In fact, the 25% government bonus is paid monthly, based on how much you deposit into your account.
This gives your savings more time to grow, as you'll earn interest on both your contributions and the bonus – known as compound growth.
Some non-holders thought you need to commit to regular monthly payments to open or maintain a Lisa – but that’s not the case.
Most Lisas can be opened with just £1, and there’s no requirement to save a fixed amount each month.
You can contribute as much or as little as you like, up to £4,000 a year to earn the 25% bonus. You can deposit more than that if you wish, but you won’t get a bonus on anything above the limit – and your total ISA contributions must stay within the £20,000 annual allowance.
Find the right savings account for you using the service provided by Experian Ltd
Compare and chooseTo open a Lisa, you must be aged between 18 and 39. Once your account is open, you can keep paying into it and receiving the 25% government bonus until you turn 50.
If you don’t have a Lisa, it could be worth opening one before your 40th birthday – even if you don’t intend to save straight away. That way, you’ll still be eligible for the bonus in future.
