Are the savings in a Lifetime ISA (LISA) being considered for Premium Bonds? The central decision is whether paying the LISA early‑withdrawal charge (commonly called the LISA transfer penalty) to move money into Premium Bonds makes financial and practical sense. This guide answers that question directly and gives clear next steps.
Key takeaways: what to know in one minute
- Withdrawing a LISA to buy Premium Bonds normally triggers a 25% government charge — this is not a simple transfer and will reduce the pot immediately.
- Transferring a LISA between LISA providers is penalty‑free, but you cannot transfer a LISA directly into Premium Bonds; that requires cashing out or moving funds by withdrawing.
- If the withdrawal qualifies (first home or age 60) there is no charge and the government bonus remains intact — in those cases moving into Premium Bonds is straightforward.
- Premium Bonds' expected return equals the published prize fund rate (mathematical expectation); compare that to the effective LISA return including the 25% bonus before deciding.
- Practical route: check eligibility for penalty exemption, compare net proceeds after charge, and follow a step‑by‑step withdrawal and NS&I subscription process if proceeding.
What is the LISA transfer penalty explained
A common misconception is that a 'LISA transfer penalty' applies when switching providers. In reality there are two separate processes:
- LISA to LISA transfers: moving a LISA account from one registered provider to another is penalty‑free if done as an internal transfer (the provider-to-provider route). This keeps the government bonus intact.
- LISA withdrawals (unauthorised): withdrawing cash from a LISA for any reason other than a permitted purpose (first home purchase, age 60, terminal illness, or death) triggers a government charge applied to the withdrawal amount. That charge is 25% at time of writing (indicative at 2026) and is often referred to colloquially as the penalty.
The 25% charge is applied by the LISA provider at the point of withdrawal. It does not only take the bonus — it is levied against the full withdrawal amount, which means the saver can lose more than the original government bonus. The exact net effect depends on the ratio of personal contributions to the government bonus in the pot.
For up‑to‑date official details see the government pages: Lifetime ISA (gov.uk) and an accessible explanation at MoneyHelper.
How transferring LISA affects your government bonus
The government bonus for a LISA is a 25% top‑up on contributions (up to £4,000 per tax year, so up to £1,000 bonus a year). Two scenarios matter when considering movement of funds:
- Penalty‑free transfer between LISAs: bonus is retained and remains invested, so there is no effect on the government bonus.
- Unauthorised withdrawal (to buy Premium Bonds): the 25% withdrawal charge effectively cancels the bonus and can eat into some personal contributions. For example, a balance of £12,000 (say £9,600 contributions + £2,400 bonus) faces a £3,000 charge if withdrawn — net cash received £9,000. The saver loses £600 of their own contributions in that example as well as the future value of the bonus.
In short: moving funds out of a LISA to a non‑LISA product normally destroys the tax‑efficient benefit unless the withdrawal qualifies under an exemption.
Can you move LISA savings into Premium Bonds?
Yes — but almost always only by withdrawing from the LISA and then buying Premium Bonds. There is no direct in‑spec transfer route from a LISA to Premium Bonds because Premium Bonds are not an ISA wrapper. Practical points:
- If the withdrawal is unauthorised, it will incur the 25% charge described earlier (indicative at time of writing). That reduces the amount available to purchase Premium Bonds.
- If the withdrawal is authorised (buying a first home, aged 60 or over, terminal illness or death), there is no charge and funds can be moved into Premium Bonds with no penalty.
- A LISA transfer between providers keeps the funds inside the LISA wrapper; only cashing out enables purchase of Premium Bonds.
Compare the two routes before acting. The cost of an unauthorised withdrawal typically outweighs the benefit of short‑term prize potential for many savers. See NS&I Premium Bonds details: NS&I Premium Bonds.
Compare tax and risk: ISA versus Premium Bonds
Key comparison points between a LISA (or other ISA) and Premium Bonds are tax treatment, risk to capital, expected return, and liquidity. The table below summarises the most relevant items for the LISA vs Premium Bonds decision.
| Feature |
Lifetime ISA |
Premium Bonds (NS&I) |
| Tax |
Tax‑free returns; 25% government bonus on contributions (subject to rules) |
Prize winnings are tax‑free; no interest and no bonus top‑up |
| Risk to capital |
Depends on LISA type: cash LISA capital at provider risk (FSCS cover may apply), S&S LISA subject to market risk |
Capital guaranteed by HM Treasury via NS&I — nominal capital is safe, returns uncertain |
| Expected return |
Depends on interest rate or investment performance plus 25% bonus on contributions |
Mathematical expectation equals the published prize fund rate (check NS&I for current rate) |
| Access |
Restricted: unauthorised withdrawals carry the 25% charge; permitted withdrawals for house or age 60 are allowed |
High liquidity: bonds can be cashed (NS&I processes) with minimal delay; no early withdrawal charge |
| Protection |
Cash LISAs may be FSCS protected (up to £85k) if provider is covered; S&S LISAs not protected from market loss |
Backed by HM Treasury (explicit guarantee of capital); not FSCS as such |
Notes: the prize fund rate and LISA interest rates change; figures given here are indicative at time of writing and should be checked on provider sites.
Penalty exemptions and transferring for house purchase
A crucial exception: withdrawing from a LISA to buy a first home (meeting the LISA rules — e.g. property price limits, UK property, solicitor handling) avoids the 25% charge. In that case:
- The transfer of cash from a LISA to the property purchase is treated as an authorised withdrawal; no penalty and the full government bonus is available to apply to the purchase.
- If the house purchase does not proceed or the conditions are not met, a charge may still apply.
Similarly, a withdrawal after turning 60 is penalty‑free. Terminal illness or death are other exemptions; legal or executor processes apply.
If the purpose is not a permitted one, there is no statutory exemption for moving to Premium Bonds — the saver will face the withdrawal charge.
For authoritative rules on permitted withdrawals see: official guidance (gov.uk).
Practical steps to transfer or cash your LISA
Step 1: check whether a penalty exemption applies
Confirm if the intended use is a permitted purpose (first home purchase, aged 60, terminal illness or death). If yes, withdrawal is penalty‑free. Obtain documentary evidence where needed (solicitor confirmation for house purchase).
To keep the bonus: ask the new LISA provider to manage a direct transfer. Do not withdraw cash with the intention of re‑depositing: that risks losing the bonus and creates possible tax year contribution issues.
Step 3: if moving to Premium Bonds and an exemption applies, withdraw accordingly
If the withdrawal is authorised, follow the provider's withdrawal process and then set up an NS&I Premium Bonds subscription with the proceeds.
Step 4: if moving to Premium Bonds requires an unauthorised withdrawal, calculate the net proceeds and alternatives
Calculate the effect of the 25% charge on the current pot. Compare the net amount that would go into Premium Bonds with the value of staying invested in the LISA (including future bonus, interest or expected returns). Consider time horizon, prize fund rate and liquidity needs.
Step 5: execute the withdrawal and purchase
If the decision is to proceed, use the LISA provider's official withdrawal form; request the payment method needed by NS&I (bank transfer usually). Then open an NS&I account and subscribe to Premium Bonds via NS&I.
Step 6: keep records and check tax/benefit implications
Retain written confirmation of the withdrawal, the charge applied, and the Premium Bonds subscription. Some means‑tested benefits or future tax interactions can be affected by large transfers — seek regulated advice if unsure.
Example scenarios: does paying the 25% charge ever make sense?
A few worked examples (indicative; numbers rounded) make the point clear:
-
Scenario A — short horizon, small pot: £5,000 in LISA. Unauthorised withdrawal charge £1,250 (25%). Net £3,750 to put into Premium Bonds. With a prize fund rate of 3.5% (expected), expected annual return on the £3,750 is £131 — likely worse than preserving the full LISA (including bonus value and any interest). Selling here rarely benefits.
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Scenario B — older saver, no future contributions, wants capital security and prize chance: £50,000 in LISA, but penalty would be £12,500; net to Premium Bonds £37,500. If the LISA is a Stocks & Shares account with expected real returns above the prize fund rate, withdrawing is likely costly.
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Scenario C — exempt withdrawal (buying first home): £10,000 LISA used to purchase house, no charge. Moving a portion of other savings into Premium Bonds is then a separate decision.
These examples show that paying the 25% charge to enter Premium Bonds is rarely favourable solely for expected return — exceptions exist if the LISA is performing poorly, the saver wants an explicit Treasury guarantee instead of FSCS exposure, or for strong liquidity preferences.
Quick flow to decide and act
Should you cash a LISA for Premium Bonds?
🔎
Step 1
Check exemption (home/60)
📊
Step 2
Calculate 25% charge effect
⚖️
Step 3
Compare expected returns
✅
Step 4
Execute withdrawal & buy Bonds
Advantages, risks and common mistakes
- ✅ Benefits when moving to Premium Bonds after authorised withdrawal: no charge, move proceeds to a Treasury‑backed product and keep tax‑free prizes.
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✅ Benefits when staying in LISA: retains government bonus and retains ISA tax wrapper; transfers between LISA providers are free and preserve the bonus.
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⚠️ Risks when withdrawing unauthorised: immediate 25% charge reduces future compounding and may cost more than the perceived prize advantage.
- ⚠️ Mistake: withdrawing and re‑depositing into another ISA within the tax year; this can breach annual allowance or lose the LISA top‑up if not done correctly.
- ⚠️ Mistake: assuming Premium Bonds guarantee a higher return; the prize is variable and returns are probabilistic — expected returns may be lower than other options when factoring the LISA charge.
Frequently asked questions
Can I transfer my LISA directly into Premium Bonds without penalty?
No. Direct transfers between LISAs are penalty‑free, but Premium Bonds are not an ISA product so moving funds requires a withdrawal. An unauthorised withdrawal usually incurs the 25% charge.
Will I lose the government bonus if I withdraw my LISA early?
An unauthorised withdrawal typically eliminates the bonus and triggers a 25% charge on the amount withdrawn. Authorised withdrawals (first home, age 60, terminal illness) do not lose the bonus.
Are Premium Bonds safer than a cash LISA?
Premium Bonds are explicitly backed by HM Treasury, so nominal capital is secure. A cash LISA may be FSCS protected (up to £85,000) with bank protection; check the provider's status. The difference is legal form of guarantee, not whether capital is safe.
What is the prize fund rate and how should it be used?
The prize fund rate is the mathematical expected annual return people use to compare Premium Bonds to interest‑bearing accounts. Check NS&I for the current published rate; use it as a baseline for expected value, not a guaranteed return.
If I move my LISA to another provider, will I lose my bonus?
No. A proper provider‑to‑provider transfer of a LISA preserves the government bonus and avoids any withdrawal charge.
How quickly can Premium Bonds be bought after a LISA withdrawal?
Once funds clear from the LISA (timings vary by provider), an NS&I subscription can be set up — often the same day if bank transfers are used, and funds show in the NS&I account.
Should a first‑time buyer move LISA funds into Premium Bonds before a house purchase?
No. If the intention is to use funds for a first home, withdrawing via the permitted route avoids charge; moving into Premium Bonds first risks timing issues and may delay completion. Keep LISA funds until the purchase is ready.
Your next step:
- Calculate the net amount after a 25% charge on the current LISA balance and compare it with staying invested (include bonus and expected returns).
- If eligible for a penalty exemption (first home or age 60), arrange an authorised withdrawal with the LISA provider and then subscribe to NS&I Premium Bonds.
- If not exempt, consider a direct LISA transfer to another provider or seek regulated financial advice before paying the penalty to move into Premium Bonds.
Written by Alan White — UK‑based personal finance researcher. Independent, factual guidance referencing HMRC and NS&I sources.