What Is a Lifetime ISA and How Does It Work?

A Lifetime ISA (or LISA) is a special Individual Savings Account introduced in April 2017, designed to help UK adults save for two major life goals: purchasing a first home or funding later life, for example, in lieu of retirement savings.

Here is how it works:

• You must open a LISA between the ages of 18 and 39, and you may contribute up to £4,000 each tax year until age 50.
• The government adds a 25% bonus to your contributions, meaning a maximum of £1,000 extra per tax year.
• Over a lifetime of maximum contributions, and dependent on your birthday being on of before 6^th April, you can receive up to £33,000 in bonuses on £128,000 of savings.
• Funds can be withdrawn tax-free under three circumstances:
  • When aged 60 or over, for any purpose.
  • To buy your first home, subject to conditions.
  • If diagnosed with terminal illness.
• If you withdraw funds for any other reason, a 25% charge applies, effectively recouping the government-paid bonus.

Government Policies Underpinning the Lifetime ISA

The Lifetime ISA operates under enabling legislation such as the Savings (Government Contributions) Act 2017, which mandates that UK taxpayers receive the bonus on qualifying savings.

Pros and Cons of a Lifetime ISA

Benefits:

• Generous 25% government bonus, up to £1,000 “free” per year 
• Completely tax-free growth and withdrawals when used correctly 
• Dual-purpose flexibility: can be used for a first home or retirement, with the right strategy and time horizon 

Considerations:

• The property you plan to buy must cost £450,000 or less.
• The 25% withdrawal penalty for non-qualifying use can result in losing part of your original saving.
• The scheme may inadvertently affect eligibility for means-tested benefits, unlike pensions.
• The dual-purpose nature can distract savers from more suitable vehicles, especially for retirement, MPs have also questioned whether it’s the best use of public funds.
• While exact uptake varies, HMRC data shows LISA subscriptions are significantly lower than other ISAs, and unauthorised withdrawals have surged, suggesting limited awareness or suitability.

Saving for Children via Junior ISAs: A Helpful Parallel

While parents cannot open a LISA on behalf of a child, starting savings early via a Junior ISA (JISA) can offer a great complementary strategy. A JISA allows parents, or grandparents, to save tax-free up to £9,000 per year for the child. The account becomes accessible at age 18. 

This demonstrates the value of beginning to save early. For example, parents building up a child’s JISA can later, as adults, open a Lifetime ISA to benefit from the 25% government bonus, helping continuity of saving through life stages.

Scenario Examples

Here are two illustrative examples to show how LISAs may be used over a lifetime:

Scenario 1: Using the LISA for a First Home at Age 35

• Start contributions at age 25, saving £4,000 per year.
• Over 10 years, total contributions: £40,000.
• Government bonus: 25%, so £10,000.
• Total pot at age 35 (assuming no investment growth for simplicity): £50,000.

This sum could be used toward a first home costing up to £450,000, providing a significant boost to a deposit.

Scenario 2: Holding the LISA for Retirement (Age 60)

• Start contributions at age 25, saving £4,000 per year until age 50 (25 years).
• Total contributions: £100,000.
• Government bonus: £25,000.
• Total pot at age 50: £125,000. Assuming modest growth, this could grow further if left invested until age 60 (still tax-free).

Even without adding investment returns, this straightforward example illustrates how systematised saving, combined with the bonus, builds a meaningful retirement supplement, especially useful for those without workplace pensions or those self-employed.

Why Seek Professional Financial Advice?

Choosing a Lifetime ISA is a decision that intersects with multiple areas, house purchase plans, retirement strategies, benefit entitlements, and investment decisions and therefore warrants tailored guidance from a professional financial adviser.

A professional financial adviser can:

• Assess if a LISA, or a different ISA, such as a Stocks & Shares ISA or a pension, is more suitable.
• Help you manage withdrawal rules, penalties, and the impact on benefits.
• Support you in making informed decisions about investment choices within the LISA, ensuring funds are authorised or recognised under FCA rules for retail use.

Danish Kamran, Financial Adviser & Mortgage Broker in Enfield Highway, North London said:

“Opening a Lifetime ISA can be a wonderful way to get that first step onto the property ladder, or build later-life savings, but it's vital you understand the rules around withdrawals and penalties to avoid unexpected costs.”

In Summary

Lifetime ISAs can offer a compelling, government-backed top-up to your saving, particularly if you’re aiming for a first home or retirement and can stick to their rules. Parents starting early with Junior ISAs give children a head start and later combining that with a LISA can deepen one’s financial foundation.

That said, the terms, such as age limits, penalties, and benefit implications, mean it’s essential to seek professional advice to ensure the LISA aligns with your broader financial plan and life circumstances.

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An ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

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Approved by The Openwork Partnership on 15/09/2025.

Sources:

• https://www.gov.uk/government/publications/individual-savings-accounts-lifetime-isa/individual-savings-accounts-lifetime-isa
• https://www.legislation.gov.uk/ukpga/2017/2/section/1
• https://www.fca.org.uk/firms/authorised-recognised-funds
• https://www.moneyhelper.org.uk/en/savings/types-of-savings/a-guide-to-lifetime-isas
• https://moneyweek.com/personal-finance/lifetime-isas/how-does-lifetime-isa-work
• https://www.morningstar.co.uk/uk/news/247557/lifetime-isa-what-are-the-rules.aspx
• https://www.theguardian.com/money/2025/jun/30/lifetime-isas-could-lead-to-savers-making-poor-investment-choices-mps-say
• https://www.thetimes.co.uk/article/best-isa-for-you-guide-xj6vqmgp2