What is the Lifetime ISA – Budget 2016 Announcement

The Lifetime ISA was announced by Chancellor George Osborne in the March 2016 Budget and launched in April 2017. It gives people under 40 a government bonus to help them buy their first home or save for later life.

Update, 2026: the government plans to replace the Lifetime ISA with a new First Time Buyer ISA, expected around April 2028. Under the proposals, published for consultation in June 2026, the new ISA would only be for first-time buyers, have no upper age limit and no withdrawal penalty, and pay its 25% bonus when you buy. You can still open a Lifetime ISA until then, and existing holders can keep paying in.

Below, we explain how the Lifetime ISA works today.

When investing, your capital is at risk.

How a Lifetime ISA works

• Who can open one: anyone aged 18 to 39.
• How much you can pay in: up to £4,000 a year, until you’re 50. This counts towards your £20,000 yearly ISA allowance.
• The bonus: the government adds 25% to what you pay in, up to £1,000 a year. If you open one at 18 and pay in the maximum every year until 50, you could receive up to £32,000 in bonuses.
• Types: cash or stocks and shares.

Using a Lifetime ISA to buy your first home

• You can use your savings and bonus towards a first home worth up to £450,000 anywhere in the UK.
• The account must have been open for at least 12 months.
• You must buy with a mortgage, and the money is paid to your conveyancer.
• The limit is per person, so two first-time buyers buying together can both use their Lifetime ISAs.

The £450,000 cap hasn’t changed since 2017, while house prices have risen, especially in London and the South East. Check that the homes you’re looking at are under the cap.

Using a Lifetime ISA for retirement

• From your 60th birthday, you can take out all your money tax-free.
• You can also withdraw without penalty if you’re terminally ill.

What if you withdraw early?

If you take money out for any other reason before 60, you pay a 25% charge on the amount you withdraw. Because the charge applies to your money plus the bonus, you lose slightly more than the bonus.

Example: you pay in £4,000 and get a £1,000 bonus, making £5,000. If you withdraw it all for another reason, the 25% charge is £1,250, leaving you with £3,750. That’s £250 less than you paid in.

When the Lifetime ISA was first announced, the plan was a 5% charge on top of losing the bonus. In practice, the charge is 25%.

Lifetime ISA vs a pension

For basic-rate taxpayers, the 25% bonus is equivalent to the 20% tax relief on a pension. The difference is that Lifetime ISA withdrawals after 60 are tax-free, while most pension withdrawals are taxed. That makes the Lifetime ISA attractive for basic-rate taxpayers.

But a pension is usually better if your employer adds contributions or if you’re a higher-rate taxpayer. Read our full comparison of a SIPP vs a Lifetime ISA.

Help to Buy ISAs

The Help to Buy ISA closed to new savers in November 2019. If you already have one, you can keep paying in until November 2029. You can transfer it into a Lifetime ISA, but you can only use the bonus from one of them to buy your home.

The ISA allowance

Alongside the Lifetime ISA, the overall ISA allowance rose to £20,000 a year from April 2017, and it’s still £20,000 in 2026/27. You don’t pay tax on income or gains inside an ISA. From April 2027, if you’re under 65, no more than £12,000 of it can go into cash ISAs.

For official details, see GOV.UK’s Lifetime ISA guide.

Disclaimer: This is not financial advice.