For nearly a decade the Lifetime Isa has been a tax-efficient place to save for a first home or retirement, with the government adding a 25 per cent cash bonus each year.
Its days are numbered, however. The government says that the account’s dual function is too complicated, so is set to replace it with something simpler. No details have been confirmed yet though, so for now anyone aged 18 to 39 can still open a Lifetime Isa — in cash or stocks and shares.
For savers like Julie Raye, from Walton-on-Thames in Surrey, the account has been a lifeline for helping to plug a retirement savings gap. We take a look at who could still benefit from the account, and who would be better off putting their money elsewhere.
Money newsletter
The latest personal finance and investment news from our money team.
Sign up with one click
How does a Lifetime Isa work?
You can put up to £4,000 each tax year into a Lifetime Isa until you are 50 and the government will top this up with a 25 per cent bonus of up to £1,000 a year.
However, if you open an account intending to use it to buy a first home then beware: there is a £450,000 cap on the value of property you can use it for, which can be a problem for some buyers in London and the southeast.
If you withdraw the money in a Lifetime Isa for anything other than a first home worth less than £450,000 and you do it before you are 60, then you have to pay a penalty on that withdrawal.
Buyers then have two options: leave the money until they turn 60, or pay the penalty to withdraw the funds. Note that you also have to wait at least 12 months after making your first deposit in a Lifetime Isa before you can make a withdrawal.
What is the penalty?
Withdrawals outside the rules incur a 25 per cent charge. This applies to the full amount in the account, so it wipes out the government bonus and some of your savings too.
Alice Haine from the investment platform Bestinvest said: “Someone contributing £4,000 to a Lifetime Isa will have their pot boosted to £5,000 by the government. Withdrawing it before 60 or to buy a house worth more than £450,000 triggers a £1,250 penalty, wiping out the bonus and eroding their original savings. This amounts to a 6.25 per cent penalty on their own money.”
You can withdraw the money without penalty if you are terminally ill with less than 12 months to live.
Is a Lifetime Isa better than a pension?
The benefits of using a Lifetime Isa for a property deposit are fairly simple to calculated, despite the £450,000 limit. For those who already own a home and older savers the big question is how saving in a Lifetime Isa compares with a pension.
For higher and additional-rate taxpayers, the extra income-tax relief (at 40 per cent or 45 per cent) available to them on pension contributions makes them more likely to be the first choice for retirement savings.
Employees would be better off paying enough into their pension to qualify for the maximum contribution from their employer, regardless of the income tax rate they pay. But self-employed people don’t typically have this option. In that case the Lifetime Isa can be useful for basic-rate taxpayers because the 25 per cent government bonus works out the same as basic-rate tax relief on pension contributions, up to the £4,000 limit.
In addition, unlike pensions, which can’t be withdrawn until age 55 (rising to 57 from April 2028), Lifetime Isa funds have the option for withdrawals at any time, albeit with the 25 per cent penalty. This flexibility can be handy for self-employed people juggling uncertain income.
One benefit the Lifetime Isa has over a pension is that, as long as you avoid the penalty, withdrawals are completely tax-free. With a pension, only 25 per cent can typically be taken tax-free and the rest will be taxed as income.
A basic-rate taxpayer who pays £4,000 a year from age 25 to 50 into a stocks and shares Lifetime Isa or a pension would have paid in £100,000 and earned £25,000 in either government bonuses or tax relief. Charlene Young from the investment platform AJ Bell said: “If we assume a modest 4 per cent annual investment growth after charges, both pots would stand at about £216,000 at age 50. By age 60, they could be £375,000 at the same growth rate and no further top ups.” So far, so equal.
But other than the 25 per cent of the pension that can be taken tax-free (£93,750), any other withdrawals would be subject to income tax. Say they withdrew another £40,000 and had no other taxable earnings they would pay £5,486 in tax, according to AJ Bell. The same investor would pay no tax at all on a £40,000 Lifetime Isa withdrawal.
‘I’m using my Lifetime Isa to close the pension gap’
Julie Raye, 42, from Walton-on-Thames in Surrey, has a Lifetime Isa to save for retirement. “That might sound straightforward, but as a mother, it isn’t just a financial move, it’s a refusal to accept that motherhood should come with a lifetime penalty,” she said. “Caring for others shouldn’t mean abandoning your future self.”
Women retired with an average of £113,000 less in their pension than men in 2025, according to Scottish Widows, and the gap was about £13,000 wider than in 2024. The pensions firm said that more than a third of women face poverty in retirement with career breaks while caring for children being an important factor.
Raye, who is married with a five-year-old son, was made redundant in October after 18 years advising defence firms. She said: “Going back to work after maternity leave, I was pushed to the kerb. Important team meetings would be scheduled on my days off.” Raye spoke to her HR director. “I told her, ‘It’s awful being back.’ And she said, ‘It was like that for me, with all three of my kids.’
“I just thought, this is ridiculous,” Raye said. She set up a new business coaching working mothers. She also has a podcast, Mama’s Flight Path, which she uses to highlight the problems that they face. “Just because I had a baby and was part-time doesn’t mean I don’t still have ambition,” she said.
When Raye became self-employed at 38 she opened a Lifetime Isa with the savings firm Moneybox. “I didn’t want to grow old and poor from the impact of the maternity gap,” she said. “The Lifetime Isa was a win-win with the 25 per cent bonus.” She has just under £19,000 in the account and puts in £200 a month through direct debit.
Only 36 per cent of the self-employed are on track for an “adequate” retirement, according to the investment platform Hargreaves Lansdown, compared with 46 per cent of employees.
Rachael Griffin from the wealth manager Quilter said: “Retirement saving can easily slip down the priority list. The Lifetime Isa offers a clear, visible incentive, and some people find the early withdrawal penalty before age 60 helpful because it creates a barrier to dipping into their retirement pot, but in a real pinch it can still be accessed.”
The Times has launched a Smarter with Money campaign, calling for dedicated lessons in schools and help to turn Britain into a nation of investors.
Raye chose a cash account because she said that her financial knowledge was “naive” at the time. She generally relies on her husband to sort the family’s finances. “I’m now really educating myself. But I wasn’t brought up with money confidence. Those conversations just never happened,” she said.
Raye was raised in a single-parent household and said her mother did not know much about money. Having her son was a wake-up call. As soon as he was born Raye set up a Junior Isa. “I pay £50 a month into it. That might sound little, but it will add up.”
Her plan now is to get savvy with money. She said: “All the research says that women affected by the maternity gap are more likely to be poorer and unhappier later on. I don’t want to be that woman. Quietly resentful, anxious about the future. And unlike my pensions, which are scattered over various employers, the Lifetime Isa just feels a bit more like mine.”