Many first-time buyers struggle to decide how to save a deposit: one product promises a government bonus, the other offers prize-based tax-free returns and instant access. This guide compares Lifetime ISAs and Premium Bonds specifically for those saving for a first home, focusing on how each works, realistic return expectations, penalties, liquidity and practical decision tools.
Key takeaways: what to know in one minute
- Lifetime ISA (LISA) gives a guaranteed 25% government bonus on eligible contributions, making it powerful for buyers certain to use funds for a qualifying purchase. Indicative at time of writing.
- Premium Bonds offer prize-based, tax-free potential returns with no guaranteed interest; the expected value depends on prize rates and chance, not a fixed bonus.
- Access rules differ sharply: withdrawing from a LISA for non-qualifying reasons incurs a penalty (usually 25%), while Premium Bonds can be cashed without penalty but offer uncertain rewards.
- For short horizons (1–3 years) liquidity and capital preservation matter more; Premium Bonds or cash savings may dominate, while LISAs typically suit medium-term (3–5+ years) plans aimed at using the government bonus.
- A hybrid approach often outperforms a single-product strategy: use a LISA up to the annual allowance for the bonus, and keep an emergency portion in Premium Bonds or easy-access savings for flexibility.
How Lifetime ISAs work for first-time buyers
Eligibility and contribution limits
A Lifetime ISA is available to UK residents aged 18–39 to save for a first home or retirement. Annual contributions are capped at £4,000 (current at time of writing) and the government adds a 25% bonus on contributions paid up to the annual limit. The LISA bonus is added monthly by HMRC to the provider account.
Using a LISA for a first home purchase
To use a LISA for buying a home, the property must meet qualifying rules (e.g., purchase price limits — check current limits with lenders), the buyer must be a first-time purchaser, and the LISA must have been open for at least 12 months before completion. The bonus can be used toward the deposit and counts as part of the buyer’s funds when applying for a mortgage.
What happens if funds are withdrawn for other reasons
Withdrawing LISA funds for non-qualifying reasons typically incurs a 25% government withdrawal charge, which effectively returns the bonus and takes a small extra portion of the original capital in most cases. Recent policy updates have occasionally changed the exact treatment; the 25% charge is current at time of writing.
Interaction with mortgage lenders
Not all mortgage lenders treat LISA funds identically in underwriting. Some require evidence of the bonus, statements showing funds, or extra documentation at the offer stage. Many high-street lenders accept LISA funds but underwriting policies vary — check lender guidance and confirm acceptance early in the process.
Understanding Premium Bonds: prizes, odds and NS&I
How Premium Bonds work and what NS&I offers
Premium Bonds are issued by National Savings & Investments (NS&I). Instead of paying interest, each bond enters a monthly prize draw where bondholders can win tax-free prizes ranging from small amounts to top prizes (for example, prizes up to £1 million). Bonds must be registered to the holder, and the maximum holding limit applies (confirm current limits with NS&I).
Odds, prize rate and expected value
NS&I publishes a notional prize rate each month (an annualised figure representing expected return across all bondholders). The actual experience for an individual depends on luck and distribution. The expected value equals the notional prize rate but individual outcomes can vary widely — many small holders win nothing in a given year while a few win large prizes.
Liquidity and cashing in Premium Bonds
Premium Bonds are redeemable at any time with no penalty; payment is typically prompt (a few working days). This makes them effectively liquid while retaining the chance of prize wins. Cashing in returns the original capital; winnings are awarded tax-free and do not affect personal tax allowances.
Comparing returns: Lifetime ISA bonus versus Premium Bond prizes
Expected returns: deterministic bonus vs probabilistic prizes
The LISA bonus is deterministic: deposit £1,000, receive £250 bonus (25%). Premium Bonds have a probabilistic return; NS&I’s published prize rate might suggest an average annual return (for example, 1.5%–3% equivalent in past years), but the actual distribution is skewed.
Value‑at‑risk and distribution examples
- LISA: predictable uplift. After 4 years saving £4,000 annually, bonus adds £4,000 total (25% of £16,000) assuming full use of allowance.
- Premium Bonds: expected value could match or undercut the LISA bonus depending on prize rates and time horizon; however, the chance of a large win introduces volatility.
Numeric scenario: 3-year saving to a £20,000 deposit goal
- Option A (LISA): Save £4,000/year into LISA for first three years = £12,000 contributions + £3,000 bonus = £15,000. Shortfall to target = £5,000.
- Option B (Premium Bonds): Invest £12,000 into Premium Bonds. With a notional prize rate of 1.5% p.a., expected value ~£12,540 after three years — less than LISA outcome. Chance of prize wins could bridge gap, but probability is low.
This example illustrates why the LISA bonus materially accelerates reaching a deposit target over a multi-year horizon.
Access, penalties and flexibility for saving towards a deposit
Penalties and timing constraints of the LISA
The 25% withdrawal charge on non-qualifying withdrawals makes the LISA punitive for changing plans. The 12‑month account rule for property purchases means funds need to be held for at least a year before being eligible for a house purchase. These rigid rules reduce flexibility.
Premium Bonds liquidity and practical advantages
Premium Bonds can be cashed quickly with no tax or withdrawal penalties. This makes them suitable for short-term saving, emergency buffers and holding part of a deposit where flexibility is essential. The trade-off is uncertain returns.
Hybrid strategies for deposit saving
A common practical approach for first-time buyers is:
- Use a LISA to capture the 25% bonus up to the annual allowance for the portion of savings intended specifically for the deposit and that can be committed for 12+ months.
- Keep a portion in Premium Bonds or easy-access cash for immediate liquidity and to avoid the LISA withdrawal charge in case of changing circumstances.
This hybrid mitigates LISA penalties while capturing the bonus on the committed portion.
Risk, inflation and real value: which protects your money?
Real return considerations
Inflation erodes nominal capital. A LISA that offers a cash interest rate of, say, 1% plus a 25% bonus on contributions still faces purchasing-power risk if inflation runs higher. Premium Bonds’ notional prize rate must outpace inflation over the holding period to deliver a positive real return on average.
Capital certainty vs prize variance
- LISA: capital plus bonus is straightforward if funds are used for a qualifying purchase. For non-qualifying withdrawal, the penalty can reduce capital.
- Premium Bonds: capital is secure (no risk of nominal loss when holding bonds), but expected returns may be small in real terms; prize luck is the only route to out-sized gains.
Which product protects money better for a deposit?
- For medium-term, committed buyers focused on reaching a deposit target, LISA usually offers stronger nominal acceleration because of the government bonus.
- For short-term horizons or uncertain timing, Premium Bonds or cash savings better preserve optionality, without the risk of a penalty that reduces capital.
Decision checklist for first-time buyers
- Is the purchase likely within 12 months? If yes, avoid relying solely on a LISA because of the 12‑month rule.
- Can the buyer commit to saving in a LISA annually to use the full bonus? If yes, prioritise the LISA for the committed portion.
- Is immediate access to funds required for emergency or timing flexibility? If yes, allocate some savings to Premium Bonds or instant-access accounts.
- Has the buyer confirmed lender acceptance of LISA funds and requirements? Always check with prospective mortgage lenders early.
Calculator logic (how to model outcomes)
A useful calculator should allow inputs for:
- Annual contribution to LISA and Premium Bonds
- Time horizon (years)
- Expected Premium Bonds notional prize rate (use current NS&I published rate)
- LISA contribution limit and bonus (25%)
- Likely house price target and deposit percentage
The output should show:
- Expected balance for each product (mean) and confidence intervals for Premium Bonds using a Poisson/binomial approximation of prize wins
- Time to reach deposit target under each strategy
- Impact of a non-qualifying LISA withdrawal (illustrate penalty effect)
Example comparison table (LISA vs Premium Bonds for a 3-year plan)
| Feature |
Lifetime ISA |
Premium Bonds |
| Access |
Locked for benefit; 12-month rule for property; 25% withdrawal charge if not used for qualifying reasons |
Redeemable any time with no penalty |
| Return profile |
Guaranteed 25% bonus on contributions (subject to rules) |
Probabilistic tax-free prizes; expected value equals NS&I prize rate (variable) |
| Suitability for 1 year |
Generally not recommended if house purchase <12 months |
Recommended for short horizons due to liquidity |
| Tax treatment |
Bonus is tax-free; interest within some LISAs may be taxable depending on underlying product |
Winnings are tax-free |
Note: table values are illustrative. Always confirm current rules, limits and prize rates at the provider.
Snapshot: choosing between LISA and Premium Bonds
Lifetime ISA
- ✓25% bonus on contributions
- ⚠25% withdrawal charge if not used for home/retirement
- ℹBest for committed medium-term savers
Premium Bonds
- ✓Redeemable any time with no penalty
- ✗No guaranteed return — depends on luck
- ℹGood for short-term or emergency funds
Analysis and strategy: when to pick LISA, Premium Bonds or both
When a LISA is the preferred choice
- The buyer is certain they will purchase a qualifying first home and can wait 12+ months.
- The buyer can commit a portion of annual savings to the LISA to fully utilise the £4,000 allowance where possible.
- Maximising guaranteed government bonus is the priority over liquidity.
When Premium Bonds are preferable
- The buyer requires short-term access to funds or expects the timing of the purchase to be uncertain.
- Preserving nominal capital without penalties is essential.
- The buyer values the tax-free prize possibility and is comfortable with probabilistic outcomes.
Common mistakes and risks to avoid
- Assuming the LISA bonus applies instantly; the 12‑month rule and lender acceptance can complicate timing.
- Relying solely on Premium Bonds to reach a firm deposit target within a short period.
- Overfunding a LISA without maintaining an emergency buffer outside the LISA.
Practical checklist before opening accounts
- Confirm LISA eligibility (age, first-time buyer status) and understand the 12‑month rule.
- Confirm current LISA annual allowance and any provider minimums or fees.
- Check NS&I current prize rate and maximum holding for Premium Bonds at NS&I.
- Speak to prospective mortgage lenders early to ensure they accept LISA funds and to learn documentation requirements.
- Run simple scenario calculations for time to deposit under LISA-only, Premium Bonds-only and hybrid approaches.
Frequently asked questions
Can a Lifetime ISA and Premium Bonds be used together for a deposit?
Yes. Many first-time buyers combine a LISA for the committed portion (to capture the 25% bonus) with Premium Bonds or cash for short-term flexibility.
What happens if the house purchase falls through after using the LISA?
If funds are not used for a qualifying purchase, withdrawing will usually trigger the 25% charge, reducing the net funds available. If the purchase is delayed but still qualifying, consult the LISA provider for eligible timing rules.
Are Premium Bonds a safe place to park a deposit?
Premium Bonds protect nominal capital and are issued by NS&I (backed by HM Government). However, expected returns may be low; they are best for liquidity and tax-free prize potential rather than high guaranteed returns.
Will the LISA bonus affect mortgage affordability checks?
Lenders vary. Some include the bonus as part of available deposit funds once credited; others require clear bank statements. Confirm with lenders in advance and retain LISA statements to evidence funds.
Can someone over 40 open a LISA?
No. LISAs are only for those aged 18–39 to open. Existing LISAs remain usable after 40 but cannot be opened if over the limit.
Your next step:
- Check eligibility and timelines: confirm the likely purchase timeframe and whether the 12‑month rule will be met.
- Run a three‑year scenario: calculate required monthly savings to reach the deposit under LISA-only, Premium Bonds-only and hybrid models.
- Contact two mortgage lenders to confirm acceptance of LISA funds and any documentary requirements before committing savings.
Alan White
With over 15 years of experience helping individuals navigate savings and investment options, this author provides clear, practical guidance on ISAs, Premium Bonds, and alternative savings products. Every article on ISA vs Premium Bonds draws on real-world experience, offering actionable advice, risk awareness, and strategies to help readers make informed decisions, plan for savings goals, and understand tax and legal implications. The goal is to empower readers to confidently manage their money and maximise their financial growth.