Is a LISA the right savings vehicle for you?

First-timer buyers often have a hard time saving for a deposit – no surprise given the UK’s average house price is £299,892, according to the Halifax. As such, a 10% deposit weighs in at almost £30,000.

There are a number of different ways to save for a deposit, each with positives and negatives. While we don’t recommend stashing cash under your mattress, this is the most basic form of saving. You won’t earn any interest on the money but it will be there to use as and when you see fit.

Bank on the tried and tested

Most savers use a bank account or an ISA. Bank accounts give you instant access to your money, without many/any restrictions, but everyday accounts rarely have attractive interest rates so you’ll probably earn pence on the money you save. 

ISA advantages

Stocks and shares ISAs carry risk, as you could lose the money invested, but the returns can be very attractive, especially if you take a long-term view. Cash ISAs remain a popular way to save for a deposit as you’ll always get back the money you put in. They’re also simple to understand, easy to access and generally have interest rates that are better than bank accounts, with the best reserved for limited access ISAs (those that you can only withdraw from once a year, for example).

Take up your tax-free allowance

What ISAs have in common is a tax free allowance. At present, a saver can deposit up to £20,000 each tax year in an ISA of their choosing (or split between multiple cash and stocks and shares ISAs) and enjoy returns that are tax free. ISA savers do need to be aware of an upcoming change, of importance to those who expect saving for a deposit will take a couple of years.

ISA changes ahead

From April 2027, a cash ISA’s tax free allowance will drop from £20,000 to £12,000. To benefit from the full tax free allowance, the remaining allowance, up to £8,000, must be invested in stocks and shares ISAs. If a saver invests the full £20,000 in stocks and shares ISAs, returns on the entire amount will remain tax free.

LISA: the first-time buyer ISA

The LISA (Lifetime Individual Savings Account) is a different ISA altogether and is not part of the 2027 ISA reform. The product was launched in 2017 with two specific aims: to help first-time buyers save for a deposit and to help under 40s save for their retirement. 

The headline benefit of a LISA is the Government’s contribution: it adds 25% of what the saver deposits, with some restrictions. In practice, for every £100 a LISA holder saves, the Government will add £25. The maximum that can be saved by the account holder in one tax year is £4,000, with a maximum Government top up of £1,000.

Read the LISA small print

A LISA isn’t for everyone, however, as there are restrictions that exclude some savers. The account must be opened by a saver aged between 18 and 39 and they must be a true first-time buyer to qualify: as in someone who has never owned a property before. 

The saver must also accept the property they buy will be worth £450,000 or less – a potential challenge in London and the South East. There’s also a time restriction – the property must be bought at least 12 months after the LISA is opened.

Additional limitations apply, including having to buy a property using a mortgage offered by a bank or building society, and it being compulsory to use a conveyancer or solicitor to oversee the purchase (as the LISA deposit funds are released directly to a legal professional and not the property buyer). The first LISA deposit must also be made before the account holder turns 40 and deposits can only be made up until the holder turns 50.

The LISA’s days are numbered

These and other restrictions – chiefly a 25% financial penalty if the LISA holder wants to make an unauthorised withdrawal (that’s taking out money for any other reason other than buying a first home or retiring) – have prompted the Government to rethink the viability of the LISA.

The Chancellor used the Autumn Budget to announce the Government is consulting on a LISA replacement, the byproduct being LISAs in their current guise will cease to be offered. A replacement ISA aimed at first-timer buyers will be available but details are scant.

At present we don’t know any time scales, what a replacement ISA will look like, what will happen to current LISAs and whether the full tax-free allowance will apply to any new ISA product. As such, we recommend first-time buyers take expert financial advice when saving for a deposit – please contact us for IFA recommendations.