Are you 18–25 and unsure whether a Lifetime ISA (LISA) or Premium Bonds is the smarter place to start saving? This guide gives a concise verdict up front and then walks through the rules, realistic returns, penalties and practical strategies specifically for starter savers aged 18–25.
Key takeaways: what to know in 1 minute
- For a house deposit within 1–5 years, a LISA typically offers the best boost because of the 25% government bonus (up to £1,000 a year on £4,000).
- For an emergency fund or very short-term flexibility, Premium Bonds are more liquid and carry no withdrawal penalty, though returns are variable and probabilistic.
- A LISA has strict eligibility, withdrawal and property rules; withdrawing for other reasons usually triggers a penalty that can exceed the bonus.
- Premium Bonds give tax-free prizes but no guaranteed interest; expected return equals the published prize fund rate (indicator only).
- Combining both can work: use a LISA for committed first-home saving and Premium Bonds for accessible back-up funds or topping up.
LISA vs Premium Bonds for 18–25 starter savers: direct comparison and use cases
A Lifetime ISA (LISA) and Premium Bonds are both popular with younger savers, but they serve distinct goals.
-
Lifetime ISA (cash or stocks & shares LISA): designed for first-time buyers and retirement savings. Key advantage: 25% government bonus on contributions (current limit £4,000 a tax year). Key constraint: penalties and conditions on withdrawals; property purchase rules apply.
-
Premium Bonds (NS&I): a National Savings product where money is converted into numbered bonds that enter monthly prize draws. Key advantage: prizes are tax-free and capital is backed by the government; money can be withdrawn at short notice. Key constraint: returns are random; the effective return equals the prize fund rate but with variance.
Use-case guidance for 18–25 starter savers:
- Saving specifically for a first-home deposit over 2–6 years: LISA is usually preferable because of the 25% bonus, which materially accelerates progress.
- Building an emergency fund or saving for a very short horizon (under 12 months): Premium Bonds or a high-interest easy-access cash ISA may be better because of liquidity and no withdrawal penalty.
- Unsure about buying a house within five years: a blended approach (part LISA, part Premium Bonds) can balance bonus capture and flexibility.
For official LISA rules see HMRC: Lifetime ISA. For Premium Bonds details see NS&I: Premium Bonds.
Eligibility, contribution limits and age rules for 18–25s
Eligibility and limits differ sharply between the two products. The following is current at time of writing and sourced from HMRC and NS&I.
Lifetime ISA (LISA)
- Who can open: UK residents aged 18 to 39 may open a LISA.
- Who can contribute: contributions allowed until age 50.
- Annual contribution limit: maximum of £4,000 per tax year (this counts towards the overall £20,000 ISA allowance).
- Government bonus: 25% on contributions, payable monthly; maximum bonus £1,000 a year on £4,000 contributions.
- Use windows: bonus usable for first-time property purchase (subject to price and conveyancing rules) or withdrawn from age 60 tax-free.
Premium Bonds (NS&I)
- Who can buy: UK residents aged 16 and over (parental purchases possible for under 16s with Junior Premium Bonds) may hold Premium Bonds.
- Minimum purchase: usually £25 (online or by post details with NS&I).
- Maximum holding: the maximum individual holding limit is £50,000 (current at time of writing; check NS&I for updates).
- Tax: prizes are tax-free; capital is secure (backed by HM Treasury).
Practical points for 18–25s
- A person aged 18–25 can open a LISA immediately and start receiving the 25% bonus; this is often the earliest tax-efficient route to accelerate a deposit fund.
- Because Lifetime ISAs count towards the ISA annual allowance, contributions must be planned against other ISAs.
- Premium Bonds can sit alongside ISAs: bonds are not ISAs and do not use ISA allowance, so they can complement ISA-based saving.
How the Lifetime ISA bonus helps first-time buyers: numbers that matter
The 25% bonus is LISA's defining feature. The following examples are indicative and show how the bonus affects a starter saver aged 18–25 planning for a first home.
Example scenarios (indicative, current at time of writing):
- Save £4,000 each tax year for 3 years. Annual bonus adds £1,000 per year. After 3 years: contributions £12,000 + government bonus £3,000 = £15,000 (ignoring interest).
- Save £200 per month (£2,400 per year). Annual government bonus = £600. After 5 years: contributions £12,000 + bonus £3,000 = £15,000 (plus interest).
The bonus effectively gives an immediate 33.3% uplift on money saved if contributing up to the annual limit in a year (e.g., put in £4,000 and the government adds £1,000). Over time, compounding from any interest or growth can further increase returns in a cash or stocks & shares LISA.
Important penalty note: withdrawing money for reasons other than a first-time home purchase or age 60 triggers a withdrawal charge. The charge has historically been 25% of the amount withdrawn (which can cause a loss greater than the government bonus on that amount). The precise calculation and any transitional rules can change; check HMRC guidance before withdrawing.
Understanding Premium Bonds odds, prizes and tax-free returns
Premium Bonds do not pay interest. Instead, the pool of bond-holders' funds generates a monthly prize fund. The effective rate of return for a given holding equals the prize fund rate published by NS&I, but actual outcomes for individuals are variable—the randomness means some savers win little or nothing, while others receive large prizes.
Key concepts:
- Prize fund rate: NS&I publishes a prize fund rate (an effective annual percentage) which represents the average return across all bonds. This is not a guaranteed interest rate for individual holders.
- Odds of winning: NS&I publishes odds per £1 bond and these are indicative; odds change when NS&I adjusts the prize fund rate.
- Tax treatment: prizes are tax-free and do not need to be declared on tax returns.
Simple expected-value example (indicative):
Assume a published prize fund rate of 3.0% (example only). For £1,000 in Premium Bonds, the expected annual return is roughly £30 (3.0% of £1,000). However, the distribution is skewed: many holders receive less while some receive more. Over short horizons (1–3 years) variability is large; over longer horizons expected value approaches the published rate but remains stochastic.
For the latest prize fund figures and odds see NS&I Premium Bonds.
Liquidity, withdrawals and penalties: access to your savings
Access rules matter strongly for starter savers who value flexibility.
Lifetime ISA (LISA)
- Withdrawal for first home: allowed (subject to rules). Funds must be with the LISA for at least 12 months before using them to buy a property in most cases.
- Withdrawal for other reasons: subject to a government charge (historically 25%); this can mean getting back less than the amount originally paid in.
- Withdrawal at 60+: permitted tax-free and without charge, making the account a retirement vehicle if the first-home option is not used.
Premium Bonds
- Cash-in: Premium Bonds can generally be cashed in online quickly; NS&I processes withdrawals and returns capital in full. Typical turnaround times vary—online requests are usually fastest, postal requests take longer.
- Penalties: there are no withdrawal penalties; capital is returned in full. However, there is the opportunity cost of forgone prize draws while waiting for winnings.
Practical implication: if money might be needed unexpectedly (gap in tenancy deposit, urgent travel, unexpected bills), Premium Bonds or an instant-access cash ISA offer safer short-term access. If funds are intended for a first-home deposit and the saver is confident of the timeline, a LISA delivers a valuable bonus but with access restrictions.
Technical comparison table: LISA vs Premium Bonds (for 18–25 starter savers)
| Feature |
Lifetime ISA (LISA) |
Premium Bonds |
| Primary purpose |
Boost first-home deposit or retirement |
Accessible savings with tax-free prize draws |
| Typical return |
25% government bonus on contributions (up to £4,000/yr) + interest/growth |
Variable; expected value = published prize fund rate (stochastic) |
| Liquidity |
Restricted; penalty for non-qualifying withdrawals |
High; can be cashed in without penalty |
| Tax and protection |
Bonus taxable rules applied at source; accounts held within ISA allowance; savings protected under FSCS rules where provider is covered |
Prizes tax-free; capital backed by the Government (NS&I) |
Quick savings flow for 18–25 starter savers
Starter saver decision flow
🧭 Simple flow to pick where to place new savings
**Step 1:** Is the money for a first-home deposit? ✅ → **LISA**
**Step 2:** Need instant access within 12 months? ✖ → **Premium Bonds** or cash ISA
**Step 3:** Want both bonus and flexibility? → **Split funds: LISA + Premium Bonds**
Combining LISA and Premium Bonds: a practical strategy for 18–25 starter savers
A blended approach often suits starter savers who want the LISA bonus but also need a cash buffer.
Suggested allocations (examples):
- Conservative first-time buyer (aiming to buy in 3–5 years): put maximum allowable yearly contributions into a Cash LISA up to £4,000, and keep 3–6 months' living expenses in Premium Bonds or an easy-access cash ISA.
- Unsure timeline (may rent longer): place a portion (for example 50%) of monthly savings into a LISA to accumulate the bonus and put the remainder into Premium Bonds for flexibility and the chance of prizes.
Practical steps to implement the blend:
- Open a LISA with a provider offering competitive cash interest or suitable investment options.
- Ensure at least 12 months of LISA holdings before intending to use funds for a house purchase to satisfy seller/solicitor checks.
- Use Premium Bonds for short-term emergency money or amounts that might be needed with little notice.
- Track annual ISA allowance and LISA contribution limits to avoid over-contributing.
Transfers and logistics
- Transfers from other ISAs into a LISA are permitted but follow provider rules; always use the provider’s transfer process to preserve ISA status.
- Only one LISA may be held at a time for the bonus; multiple LISAs are allowed but bonuses apply only to contributions within the rules—check provider terms and HMRC guidance.
Advantages, risks and common errors: when to choose which product
✅ Benefits / when to apply
- Choose a LISA when committed to buying a first home within a medium-term horizon (2–6 years) and aiming to maximise the 25% bonus.
- Choose Premium Bonds when preserving capital with instant access and tax-free prizes matters rather than predictable interest.
- Combine both if a saver wants to both capture a bonus and keep liquid backup funds.
⚠️ Errors to avoid / risks
- Don’t treat a LISA as an emergency fund: withdrawing for non-qualifying reasons will likely incur a withdrawal charge and net loss.
- Don’t rely on Premium Bonds for steady returns: short-term experience can include long dry spells with no wins.
- Ignore eligibility and timing: buying a property before the 12-month LISA holding requirement can invalidate bonus eligibility.
Frequently asked questions
Can a 18–25 starter saver open a LISA and hold Premium Bonds at the same time?
Yes. Holding a LISA does not prevent owning Premium Bonds. Premium Bonds are not ISAs and do not use ISA allowance, so they can complement a LISA-based strategy.
How much does the LISA penalty cost if money is withdrawn early?
The withdrawal charge is applied to non-qualifying withdrawals and has historically been 25%. This can mean the saver receives back less than contributed in some cases; check current HMRC guidance before withdrawing.
Are Premium Bonds better for tax reasons?
Premium Bonds pay tax-free prizes, which is beneficial for savers who would otherwise pay tax on interest. However, the expected return depends on the NS&I prize fund rate and is variable.
Will the LISA bonus affect mortgage application or deposit requirements?
Mortgage lenders may accept the LISA bonus as part of the deposit, but timing matters: lenders and solicitors often require proof the LISA has been open and funded for at least 12 months before completion. Speak with a mortgage adviser and the lender early.
What happens if a first-time buyer sells the property later?
If the property was purchased using a LISA, the usual property ownership rules apply. The LISA bonus is not clawed back because of later sales, provided the original purchase satisfied LISA conditions.
How quickly can Premium Bonds be cashed in?
Online cash-ins are typically processed within a few working days; postal or paper requests take longer. NS&I processing times vary; check NS&I for current timelines.
Can the LISA bonus be paid into a stocks & shares LISA?
Yes. The bonus applies to both cash and stocks & shares LISAs, but investment risk applies to stocks & shares LISAs and capital can fall as well as rise.
Your next step:
- Check the timeframe for the savings goal and decide whether the 25% LISA bonus outweighs access constraints.
- Open a LISA and set up a monthly contribution plan (even small regular amounts capture the bonus).
- Keep an accessible fund (Premium Bonds or easy-access ISA) equal to 3 months' living costs for emergencies.
Written by Alan White, personal finance researcher. For official rules see HMRC LISA and NS&I Premium Bonds.