What is a lifetime ISA & how to invest in one

Lifetime ISAs were introduced in 2017. They are designed for the under 40s who wanted to save either for their first home, or for retirement. They are a hybrid of the pension and ISA rules, offering a 25% government bonus on contributions, with all income and gains on investments held within them tax-free. They have been hugely popular, with 1.5 million people now holding an account.¹

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

What are the rules for a Lifetime ISA?

You can put up to £4,000 a year into a LISA. The government will then top this up, up to a maximum of £1,000, giving investors a potential contribution of £5,000 per year. In common with a standard cash or stocks and shares ISA, any income or capital growth you generate on the investments held within it is tax free. That means no matter how much your investments grow, you will not need to pay capital gains tax, nor do you need to declare those gains on your tax return. It also means any dividends or interest payments generated are tax free. For the 2025/2026 tax year (6 April to 5 April), the annual ISA allowance is £20,000 per person and subject to changes next year.

The money within a LISA can be kept in cash, or invested in the stock market, bonds or in investments trusts and ETFs. Alternatively, you can do a combination of both, depending on your priorities for the capital.

You can open an account up to the age of 40 (you need to put your first payment in before your 40th birthday) and can keep contributing until your 50th birthday. After 50, you can’t pay in or earn the 25% government bonus, but your savings will still earn tax-free interest or investment returns.²

What are the restrictions for a Lifetime ISA?

There are limitations on how you can use the proceeds from your Lifetime ISA. You can use it to purchase a first property, but only if it is worth less than £450,000 (the LISA house price limit) and you buy it at least a year after you make the first payment into the LISA. The funds will be paid directly to your conveyancing solicitor and you need to be buying the property with a commercial mortgage.³ Alternatively, if you don’t use it for a house purchase, you can withdraw the money at the age of 60 or over with no penalties.

The penalties for withdrawing money outside these two events are high. Investors must effectively repay the government bonus through a 25% withdrawal charge of 25%. If you are withdrawing the whole pot, a 25% charge will apply to the total amount held in your LISA, including the government bonus. If there is any doubt about how you are likely to want to use the proceeds, it may be worth considering a conventional stocks and shares ISA instead.

How does a lifetime ISA work?

Most platforms will offer Lifetime ISA accounts. They will generally offer you a choice between cash or investments. Some platforms will allow you to ‘park’ cash, while you decide where to invest. The option you choose will usually depend on your time frame. If you are planning to buy a house within the next three years, a cash or low risk fund might be a better option. If you have longer to invest – and particularly if you want to use the proceeds for retirement - you could consider a stock market option.

For long-term investors that can ride out short-term volatility, investments have the potential to deliver higher returns than cash savings. But stock markets can be choppy, and – unlike a cash ISA - your investments can go down as well as up in value. That means, potentially, getting back less than you put in.

What fees will I pay?

The fees to hold a lifetime ISA will vary according to individual platforms and also with the underlying investments you hold. Platform providers may charge a percentage fee or flat fee for the LISA itself, and then there will be charges for the underlying investments. For most open-ended funds this will be an annual percentage fee, while for ETFs and investment trusts it is likely to be a one-off dealing charge.

It is worth looking at these costs in depth because they can exert a drag on your investment returns over time. The right option may depend on your circumstances, the type of investments you want to hold and how much you are likely to hold in your LISA. Those who are holding large sums may be better with a fixed fee option, while those with smaller amounts may pay less under a percentage fee arrangement.

Can I have more than one lifetime ISA?

You can only open one Lifetime ISA in a single tax year, but you can hold more than one LISA at a time.⁴ Nevertheless, you can only contribute up to the £4,000 limit each year and there can be complexities to owning multiple accounts.

Equally, you can also hold a Lifetime ISA alongside other ISAs, such as a cash or stocks and shares ISA, as long as you do not exceed the maximum £20,000 annual allowance across all the products you hold. You can hold both a Help to Buy ISA and a Lifetime ISA, but you can only use the bonus from one to buy your home.⁵

You can also move your LISA from one provider to another. You might want to do this if you want more investment flexibility, for example, or to secure lower fees or higher interest rates. However, it is important not to sell out of one LISA to move to another, because this will be considered a withdrawal and you will be subject to the 25% charge. Instead, you should use an ISA transfer. These can be requested with your platform provider and usually take one to four weeks. These avoid penalties and charges.

What are the planned changes in the Autumn budget?

The government has announced a consultation into the Lifetime ISA, saying that a newer, simpler product should take its place. If the plans go ahead, it may scrap Lifetime ISAs in the Autumn 2026 budget, replacing them with a product focused exclusively on buying a first home.⁶

However, HMRC recently confirmed that those people who already hold a LISA will be able to pay into it indefinitely and will still be able to use it to buy a first home or for retirement. Equally, people can continue to open LISAs and claim the government bonus until the new product becomes available.

Is a Lifetime ISA worth it?

With changes to the rules imminent, some have questioned whether it is still worth investing in a LISA. They still offer some attractive features, and the LISA government bonus gives it an edge over other ISAs. Nevertheless, the rules are strict and some people have fallen foul of the house price limits, and withdrawal penalties. Normal stocks and shares or cash ISAs have far greater flexibility. You can withdraw money as and when you wish.

Ultimately, LISAs still make sense for people who are sure on how they will spend the proceeds, and who fit into the relevant age groups. It can be useful to have a pot of capital ear-marked for buying a home or retirement that you cannot touch without penalties. They remain an important part of the savings options for investors.

Source:

¹Independent - Government issues major update on Lifetime ISAs held by 1.5m Britons - 9 January 2026
²Gov.uk - Lifetime ISA: overview - 26 February 2026
³Gov.uk - Withdrawing money from your Lifetime ISA - 26 February 2026
⁴Gov.uk - The New Lifetime ISA - February 2026
⁵Moneybox - Can I have a Lifetime ISA and a Help to Buy ISA? - 26 February 2026
⁶Independent- Government issues major update on Lifetime ISAs held by 1.5m Britons - 9 January 2026

Risk Warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time and depend on personal individual circumstances.