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The Lifetime ISA, or LISA, is a government scheme for the younger generation that offers up to £33,000 in cash bonuses for money intended for two big financial goals – buying a first home and retirement.

It’s not perfect, particularly when it comes to retirement, as for many people there may be better ways to build up a retirement pot than using a Lifetime ISA.

But the Lifetime ISA is worth it for first-time buyers, as its cash bonuses can make a real difference in how quickly you amass a deposit.

Read on for more about how the Lifetime ISA works and how it can help would-be homeowners.

What is the Lifetime ISA?

A saving and investment account that can be opened by people aged between 18 and 39 years old. You can continue paying into a LISA until the age of 50.

The government adds a 25% top-up to money contributed to a LISA each year until you’re 50. The maximum bonus is £1,000 and you can contribute up to £4,000 a year, for a total of £5,000 annually.

The money can only be withdrawn once you reach your 60th birthday or if it’s for a first home costing £450,000 or less.

There are two kinds: A cash LISA for saving in cash and the stocks and shares LISA where the money can be invested so it has the chance to grow into something bigger – although there are risks of financial loss with investing. Nutmeg offers a stocks and shares Lifetime ISA.

Read more: What is the Lifetime ISA?

The benefits for first-time buyers

The average home cost 4.2 times the average salary at the end of 2020, according to the Nationwide House Price Index. That’s close to the record high of 4.5 times reached in 2007 and well above the long-term average of 3.7 times earnings.

Raising a deposit remains a huge challenge for many people. The Nationwide data shows that a 20% deposit on the average home is equivalent to 104% of the pre-tax income of the average full-time employee – when a decade ago it was 87%.

The stand-out advantage of the Lifetime ISA is that the government top-up is added to the account so it can be saved or invested alongside the rest of the money. Over time individuals can benefit from compound returns, when interest or investment returns are added to the pot and future interest or returns are made from a larger sum.

The drawbacks for first-time buyers

Budding homeowners should be aware that properties purchased with a LISA must cost £450,000 or less – and as property prices have risen this limit is less relevant today than when the LISA launched in 2017.

The average age of a first-time buyer is 33 years old (35 in London) and by 2030 it is predicted to rise to 34.7 years old nationwide and 37 years old in London.

Raising the price cap would help more young adults get on the property ladder in places where there are greater job opportunities – where often pressure on housing supply means higher property prices. It would also help first-time buyers move into larger homes with space for growing a family.

Withdrawing the money from a LISA before the age of 60, unless it’s to buy a first home, means paying a 25% penalty charge. That means handing back the government bonus plus a little extra. So, think carefully before putting money away in a LISA – do you have an emergency fund of savings that you could rely on in an emergency?


The LISA shouldn’t be considered a pension alternative for everyone. That’s because the way people ought to save and invest for a home deposit is very different from the way it’s done to build up a retirement pot.

Here are some reasons why:

  • First, you need a far bigger sum put away for retirement – it needs to be enough to live off from when you stop working for potentially 30 or 40 years, or possibly longer.
  • Second, most people start building up investments in a pension from the start of their working life and that money can stay invested until they reach their fifties, sixties, or for some people, even later. Because your pension is invested for 30 to 50 years it can hold riskier investments than a home deposit which, hopefully, could be achieved in far less time.

Read more: The six principles of investing

Finally, the LISA’s 25% government bonus is less than the amount of ‘tax relief’ a higher-rate or additional-rate taxpayer would receive on contributions to a pension.

So, as a pension enhancer, the LISA is generally more useful to higher rate taxpayers who have maxed out their pension contributions for the year.

The LISA is not a one-size fits-all solution to help millennials and Generation Z become homeowners and retire comfortably.

It has some quirky rules – such as the property price limit – and won’t suit those with more attractive pension benefits. So do your research, understand that the LISA may not be right for everyone, but remember that it can be a powerful force that helps you hit your goals more quickly.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest.

A stocks and shares Lifetime ISA may not be right for everyone. You must be 18–39 years old to open one. If you need to withdraw the money before you’re 60, and it’s not for the purchase of a first home up to £450,000, or a terminal illness, you’ll pay a 25% government penalty. So, you may get back less than you put in.

Compared to a pension, the Lifetime ISA is treated differently for tax purposes. You may be better off contributing to a pension.

If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions.

If you are unsure if a Lifetime ISA is the right choice for you, please seek financial advice.

A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice.