Lifetime ISAs are an attractive product for aspiring homeowners and retirement savers (Image: Getty)
Last week the Treasury Committee launched a call for , a type of tax-free savings account that helps people save for a house purchase as well as a pension.
Experts have urged the Government to reform the Lifetime ISA, or LISA, by removing the charge made for early withdrawals and lifting the maximum property purchase price from £450,000.
Laura Suter, director of personal finance at AJ Bell, said the Treasury Committee’s call for evidence on how the Lifetime ISA could be reformed would look at whether improvements are needed, or whether it should be scrapped altogether.
She said: “There’s no denying that the account is more complicated to explain than a standard ISA, with its dual purpose for saving for a first home and for retirement meaning it can appeal to two very different groups of people.
“However, with the 25% government bonus the product is unbeatable for many wannabe homebuyers, while also providing a good incentive for some pension savers.”
The Lifetime ISA includes a 25% bonus payment on deposits of up to £4,000 a year.
This type of ISA comes with strict conditions. so any withdrawals are penalty-free only if used to buy a property, with a purchase price of up to £450,000, or if someone is wanting to access it after 60 for retirement income.
Suter said: “More than 750,000 people paid into a Lifetime ISA in the 2022/23 tax year, with just shy of £1.9bn paid into the accounts, showing how popular they are.”
The financial expert said there were five types of savers who should be looking at taking out a LISA whether or not the account is scrapped.
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1. The self-employed pension saver
“The 25% government bonus on offer is effectively the same as in a pension for basic-rate taxpayers up to the £4,000 limit, but Lifetime ISA funds have the flexibility to be withdrawn early and completely tax-free after age 60. Pensions, on the other hand, generally can’t be touched until you reach age 55 and only 25% of the fund would not be subject to income tax.”
“However, savers have to bear in mind the age restrictions on the account – you cannot open it after your 40th birthday and there is a block on bonus payments from age 50.”
Someone who pays in £4,000 a year from age 18 to 50 into either a Lifetime ISA or a SIPP will receive exactly the same amount of government bonus (£32,000). If we assume 4% annual investment growth after charges, both will have built a healthy looking fund worth £326,000.
2. The first-home buyer (who won’t be priced out)
Suter said: “For anyone saving for their first home, the Lifetime ISA is pretty unbeatable with the 25% government bonus boosting your deposit savings. If you pay in the maximum £4,000 per year, you’ll get a juicy £1,000 bonus from the government – giving an immediate 25% top-up to your savings.
“If you had saved £4,000 into a Lifetime ISA for each of the past nine tax years since the account was launched and had seen 4% investment growth a year, you’d have a pot worth £48,000. However, if you’d saved that same amount of money in a standard ISA, still earning 5% return a year, you’d have a pot worth just over £38,000. That means by shunning a Lifetime ISA you’d be £10,000 worse off.
“However, the property limit for the Lifetime ISA is £450,000 and has remained at that level since its launch in 2017 with no signs of it increasing, despite many calls for it to do so.”
3. The undecided nearing their 40th birthday
Once you hit 40 you can no longer open a Lifetime ISA so anyone nearing this milestone birthday should think about opening an account and funding it with a small amount of money, just so they have the option of using it in the future, advised Suter. You can pay into the Lifetime ISA up until the age of 50 – and get the government bonus until that point too. Then the account can remain invested but with no further contributions into it until the age of 60 when you can withdraw the money tax free. “You might have already bought your first home and have a pension with your employer, but you don’t know what the future might bring and so it could be smart to open the account so you could use it in the future.”
4. The Help to Buy ISA saver who has reached their limits
“Help to Buy ISA accounts are now closed for newcomers, but many people still have the accounts open and their deposit savings in there. However, they may be better off moving to a Lifetime ISA for a couple of reasons.
“First, the property limit. With the Help to Buy ISA you can use it on a property worth up to £450,000 in London, but only on a property worth up to £250,000 outside London. This has proved a problem for some outside of the capital. With the Lifetime ISA there is a limit of £450,000 regardless of what area of the UK you’re buying in. So if you’re priced out of the Help to Buy ISA, you could transfer to a Lifetime ISA.
“Second, the maximum government bonus. Both the Help to Buy ISA and Lifetime ISA get the same 25% government bonus, but with the Help to Buy ISA this is limited to the first £12,000 saved – meaning a maximum bonus of £3,000. With the Lifetime ISA you can get up to £1,000 a year in government bonus, up until the age of 50. If you opened a Lifetime ISA at age 18, that is a maximum government bonus of £32,000. If you’ve maxed out your Help to Buy ISA bonus and still have more to save, you could switch to a Lifetime ISA.
5. The mega pension saver
“Lifetime ISAs are also a good option for those who have maxed out their pension savings but still want to put away more for retirement. The pension annual allowance has increased, so most people have £60,000 a year they can put into their pension (assuming they have sufficient earnings), plus any unused allowances for up to three years. But some high earners will have a lower limit, thanks to the tapered annual allowance. Either way, if you’ve hit your annual pension allowance you might want to use the Lifetime ISA to squirrel away up to £4,000 a year extra for your retirement savings.”
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Best buy cash LISAs
Comparison website Moneyfacts has listed the following Liftime ISA as best buys (17 January 2025)
These are all cash LISAs – which work like a savings deposit and invest in cash.
Paragon Bank – Issue 3, paying 3.51% (AER)
Moneybox Cash – paying 5%
Tembo Cash – paying 4.8%
Bath BS – paying 3.4%
Nottingham BS Online – paying 3%
Before opening any savings account, always shop around. You can find more details about LISAs and whether they are the right savings account for your aboutr LISAs on the free Government money advice website .
You can also use your LISA allowance to invest in stocks and shares, but the value of your savings can fall as well as rise.