25%. That's the government bonus on Lifetime ISA contributions, and it's the single number that changes the arithmetic for a near-term deposit. For someone in their late 20s aiming to buy in about 12 months, the practical outcome is simple: keep the deposit portion in a cash Lifetime ISA and reserve a stocks and shares Lifetime ISA for money you won't need before the purchase. Open a Lifetime ISA now and make at least one qualifying payment so the account has been active for 12 months before completion.

A near-term house deposit will be exposed to loss if held in a stocks and shares LISA, because the Lifetime ISA's 12-month holding rule and the government withdrawal charge can bite at the worst possible moment.

Why cash for a 12-month horizon

Lifetime ISAs let savers put in up to £4,000 each tax year and receive a 25% government bonus, which means up to £1,000 a year in free money. That bonus is guaranteed on cash, and so is any quoted interest rate. Providers and advisers in the sector therefore recommend a cash LISA or other short-dated cash savings when the purchase horizon is about a year, because the combined interest and bonus gives a guaranteed uplift while avoiding market drawdowns.

There are two timing rules that make this important. First, to use LISA funds penalty-free for a home you must be a first-time buyer, the property must be in the UK and cost no more than £450,000. Second, the account must have been open for at least 12 months before completing the purchase. If you withdraw money for a non-qualifying purpose, or try to use the bonus before the 12 months have elapsed, a government withdrawal charge applies. Barclays notes that investment values can fall as well as rise, so investor risk tolerance and the time available matter when choosing between cash and investment LISAs.

A stocks and shares LISA can deliver higher returns over many years, and it's the obvious vehicle for money that you don't expect to touch when you move. The crucial distinction is horizon. If the money is earmarked for a deposit in roughly 12 months, equities risk producing a lower balance at the moment you need it. If the money has a multi-year horizon, the higher expected returns of a stocks and shares LISA can outweigh short-term volatility.

Mastheads

That arithmetic also interacts with contribution limits and other accounts. You can open a Lifetime ISA between ages 18 and 39 and keep paying in until age 50. The account can hold cash or qualifying stocks and shares investments, and transfers in from a Help to Buy ISA are permitted within the contribution and account rules.

Given the £4,000 annual allowance, some savers split contributions by priority: use cash LISA space for near-term saving where the bonus must be preserved, and use stocks and shares LISA space for longer-term pots.

There is also an alternative argument about pensions. Some analysts point out that if you have access to a workplace pension with employer contributions, prioritising pension saving may deliver a better immediate return than diverting funds solely into a LISA. Employer match is, for many people, an instant return that can exceed the advantage of prioritising a LISA when mortgage timing is uncertain.

One more practical point: cash LISA rates have been more competitive recently, which strengthens the case for cash when the purchase horizon is short, since the effective uplift from interest plus the 25% bonus can be meaningful without taking market risk.

So how to think about the split in practice? First, treat the deposit you will need within 12 months as cash. Keep it in a cash LISA or a short-dated cash account so the bonus and interest are protected. Second, any additional savings that you expect not to need within the purchase window can go into a stocks and shares LISA, on the understanding that its value can fall as well as rise.

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Make one qualifying payment now so the account has been open for 12 months before you complete the purchase. Keep the deposit in a cash LISA to protect the 25% bonus, and before exchange compare cash LISA rates and provider transfer terms if you need to move funds.

This article was created with AI assistance.