Lifetime Isa faces uncertain future: is it still a good way to save for a house?

Is the lifetime Isa (Lisa) still fit for purpose? That's the question the Treasury Committee is asking, nine years after the tax-free account was launched to help people save for their first home or retirement.

The Lisa's main selling point is the 25% bonus the government pays on savings. This offers a significant boost to tens of thousands of first-time buyers hoping to get on to the property ladder every year. 

However, Lisa rules have remained static since the accounts were introduced, despite rising house prices and increased living costs. The Treasury Committee has therefore launched a review of the product to see if it's time for a shake-up.

Here, Which? takes a closer look at what the Lisa offers and explains alternative ways you can save.

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How does a lifetime Isa work?

The lifetime Isa is a tax-free savings account designed to help younger people buy their first home or save for retirement.

Adults aged between 18 and 39 can open a cash Lisa which pays interest, or a stocks and shares Lisa that can benefit from investment growth.

The government pays a bonus worth 25% of what you pay into the account, up to £1,000 every tax year until you turn 50 years old.

Deposits of up to £4,000 a year are eligible for the 25% bonus. You can add more than this, but it won't receive an additional government contribution.

The amount you pay in is linked to your annual Isa allowance. For example, if you pay £1,000 into your Lisa, you can still pay £19,000 into other Isa products such as a stocks and shares or cash Isa.

Lifetime Isas aren't perfect

There is no doubt that the Lisa is popular with savers. The latest HMRC figures show a cumulative total of £1.87bn was invested in Lisas during 2022-23 – up 10% on the previous financial year. 

The average amount paid in was £2,478, and 56,900 people used their Lisa to buy a home in 2023/24, an annual increase of 1,150. 

Despite this, Lisas have faced growing criticism in the past few years around price caps and withdrawal penalties.

Price caps

Currently, the maximum price of a property that can be bought with a Lisa bonus is £450,000. The problem is that house prices have risen significantly since that limit was set back in 2016. 

This means that those who arguably need the bonus the most, first-time buyers purchasing their first home in London, may struggle to find a home that fits within the rules.

Withdrawal penalties

If the price cap remains frozen, it risks pricing more people out of using their Lisa. If they decide to withdraw the money anyway, they will face a penalty of 25% on the amount they take out.

That can lead to a loss for some savers. Let's say you opened the account with £4,000 and received £1,000 from the government. Not including any interest or investment growth, you'd have a total of £5,000. If you wanted to withdraw that money early, you'd be hit with a 25% penalty of £1,250, leaving you £250 out of pocket.

What will the Lisa review include?

The Treasury Committee is seeking views from industry experts and consumers on whether the Lisa is up to scratch in 2025. Changes it is considering include:

• raising the property purchase price limit
• ending the early withdrawal penalty
• increasing the £4,000 a year limit that savers can get a bonus on
• restricting the Lisa to those with no access to a workplace pension
• scrapping the Lisa completely.

If you want to take part in the review, you have until 4 February 2025 to submit any evidence via the Treasury Committee website.

Alternative ways to save

A Lisa isn't the only savings option for first-time buyers or those planning for retirement. Here are a couple of other ways to build your nest egg.

Mix and match your Isas

Savvy savers and investors can split their £20,000 allowance across multiple types of Isa, including a Lisa. You could, for example, stash a portion of savings in a Lisa, another lump sum in the highest-interest cash Isa on the market, and then play the long game by placing the rest of your allowance in a stocks and shares Isa.

Since 6 April 2024, savers have also been able to open and pay into multiple Isas of the same type annually. This replaced previous rules that only let you put money into one of each type of Isa every tax year. You can split cash Isa savings across an instant access account and a fixed-rate account that locks up your money for longer, for example. 

With cash Isas still enjoying rates of up to 5% AER, this extra flexibility may appeal to savers who have already opened an account but still have some remaining allowance to invest.

• Find out more: Best cash Isas 2025

Open a pension

The lifetime Isa offers an alternative for younger people who might otherwise save into a personal pension or a self-invested personal pension (Sipp). But you might want to save into both, as the Lisa isn't a replacement pension but rather an additional savings vehicle.

In some cases, however, a traditional pension may be a better option if your goal is to fund your retirement. A pension is particularly beneficial for people who are already in a workplace scheme and your employer contributes (under auto-enrolment rules your employer will contribute at least 3%).

The same is true if you're a higher-rate taxpayer (so qualify for pension tax relief) and you are likely to be paying a lower rate of tax in retirement than you did in work.

For more advice, take a look at our guide comparing lifetime Isas with more traditional ways of saving for your retirement.

Help with buying your first home

Lisas are a good way of boosting your deposit when buying your first home, but there are some alternatives out there.

Our guide on first-time buyer schemes outlines a range of options, including schemes that help people with small deposits or make it more affordable to buy their rented home.

It's also worth looking into your mortgage options. This could include considering  a guarantor mortgage (where your parent helps you buy a home) or 95% mortgages for buyers with small deposits. 

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