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<\/p>\nFor 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.<\/p>\n
Its days are numbered, however. The government says that the account\u2019s 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 \u2014 in cash or stocks and shares. <\/p>\n
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. <\/p>\n
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How does a Lifetime Isa work?<\/p>\n
You can put up to \u00a34,000 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 \u00a31,000 a year. <\/p>\n
However, if you open an account intending to use it to buy a first home then beware: there is a \u00a3450,000 cap on the value of property you can use it for, which can be a problem for some buyers in London and the southeast.<\/p>\n
If you withdraw the money in a Lifetime Isa for anything other than a first home worth less than \u00a3450,000 and you do it before you are 60, then you have to pay a penalty on that withdrawal. <\/p>\n
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. <\/p>\n
What is the penalty?<\/p>\n
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.<\/p>\n
Alice Haine from the investment platform Bestinvest said: \u201cSomeone contributing \u00a34,000 to a Lifetime Isa will have their pot boosted to \u00a35,000 by the government. Withdrawing it before 60 or to buy a house worth more than \u00a3450,000 triggers a \u00a31,250 penalty, wiping out the bonus and eroding their original savings. This amounts to a 6.25 per cent penalty on their own money.\u201d<\/p>\n
You can withdraw the money without penalty if you are terminally ill with less than 12 months to live.<\/p>\n
Is a Lifetime Isa better than a pension?<\/p>\n
The benefits of using a Lifetime Isa for a property deposit are fairly simple to calculated, despite the \u00a3450,000 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. <\/p>\n
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.<\/p>\n
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\u2019t 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 \u00a34,000 limit.<\/p>\n
In addition, unlike pensions, which can\u2019t 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.<\/p>\n
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.<\/p>\n
A basic-rate taxpayer who pays \u00a34,000 a year from age 25 to 50 into a stocks and shares Lifetime Isa or a pension would have paid in \u00a3100,000 and earned \u00a325,000 in either government bonuses or tax relief. Charlene Young from the investment platform AJ Bell said: \u201cIf we assume a modest 4 per cent annual investment growth after charges, both pots would stand at about \u00a3216,000 at age 50. By age 60, they could be \u00a3375,000 at the same growth rate and no further top ups.\u201d So far, so equal.<\/p>\n
But other than the 25 per cent of the pension that can be taken tax-free (\u00a393,750), any other withdrawals would be subject to income tax. Say they withdrew another \u00a340,000 and had no other taxable earnings they would pay \u00a35,486 in tax, according to AJ Bell. The same investor would pay no tax at all on a \u00a340,000 Lifetime Isa withdrawal.<\/p>\n
\u2018I\u2019m using my Lifetime Isa to close the pension gap\u2019<\/p>\n
Julie Raye, 42, from Walton-on-Thames in Surrey, has a Lifetime Isa to save for retirement. \u201cThat might sound straightforward, but as a mother, it isn\u2019t just a financial move, it\u2019s a refusal to accept that motherhood should come with a lifetime penalty,\u201d she said. \u201cCaring for others shouldn\u2019t mean abandoning your future self.\u201d<\/p>\n
Women retired with an average of \u00a3113,000 less in their pension than men in 2025, according to Scottish Widows, and the gap was about \u00a313,000 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.<\/p>\n
Raye, who is married with a five-year-old son, was made redundant in October after 18 years advising defence firms. She said: \u201cGoing back to work after maternity leave, I was pushed to the kerb. Important team meetings would be scheduled on my days off.\u201d Raye spoke to her HR director. \u201cI told her, \u2018It\u2019s awful being back.\u2019 And she said, \u2018It was like that for me, with all three of my kids.\u2019<\/p>\n
\u201cI just thought, this is ridiculous,\u201d Raye said. She set up a new business coaching working mothers. She also has a podcast, Mama\u2019s Flight Path, which she uses to highlight the problems that they face. \u201cJust because I had a baby and was part-time doesn\u2019t mean I don\u2019t still have ambition,\u201d she said.<\/p>\n
When Raye became self-employed at 38 she opened a Lifetime Isa with the savings firm Moneybox. \u201cI didn\u2019t want to grow old and poor from the impact of the maternity gap,\u201d she said. \u201cThe Lifetime Isa was a win-win with the 25 per cent bonus.\u201d She has just under \u00a319,000 in the account and puts in \u00a3200 a month through direct debit.<\/p>\n
Only 36 per cent of the self-employed are on track for an \u201cadequate\u201d retirement, according to the investment platform Hargreaves Lansdown, compared with 46 per cent of employees.<\/p>\n
Rachael Griffin from the wealth manager Quilter said: \u201cRetirement 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.\u201d<\/p>\n
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