Understanding Lifetime ISAs – LISAs

Tuesday 27 May, 2025

When it comes to saving for the future, whether you are planning for your first home or looking ahead to retirement, a Lifetime ISA (Individual Savings Account) can be a powerful and tax-efficient tool.

Introduced by the UK Government to encourage long-term saving among younger adults, the Lifetime ISA (LISA) offers a generous annual bonus on your contributions, but as with any financial product, it is important to understand the rules, benefits, and potential implications before committing.

Joe Wicks, Independent Financial Adviser, St Albans said:

“At Lonsdale, our experienced financial advisers are here to help you make the most of your money, ensuring your savings work effectively for your lifetime personal goals. And if you have children who are already saving, contributing to their Junior ISA (JISA) is the perfect stepping stone towards a Lifetime ISA and, ultimately, their first home.”

How the Lifetime ISA Works

The Lifetime ISA is available to individuals aged between 18 and 39. You can contribute up to £4,000 per tax year, and the Government will top up your contributions with a 25% bonus, meaning you could receive up to £1,000 in bonuses each year. You can continue contributing and receiving the bonus until the age of 50.

The funds within your Lifetime ISA can be used for one of two specific purposes: either to purchase your first home (worth up to £450,000) or to support your retirement once you turn 60.

Importantly, if you withdraw funds for any reason other than buying your first home, reaching age 60, or being terminally ill with less than 12 months to live, you will be charged a 25% penalty. This effectively removes the government bonus and may result in a small loss on your original savings, so it’s essential to use the account as intended.

The Benefits of Saving with a Lifetime ISA

The most obvious benefit of a Lifetime ISA is the 25% government bonus, which significantly enhances your savings potential. For every £1,000 you save, you receive an additional £250 from the government, a return that far exceeds typical interest rates from standard savings accounts or even some investment ISAs.

Another key advantage is that any interest or investment gains earned within the account are free from income tax and capital gains tax. This makes the Lifetime ISA an efficient vehicle not just for saving cash, but also for longer-term investments when managed correctly.

Whether you are saving to buy your first home or building a nest egg for later life, the Lifetime ISA offers tangible rewards for disciplined savers.

What Could You Save?

To illustrate how the Lifetime ISA can support different savings goals, let us consider a few examples.

Imagine an 18-year-old starts saving £1,000 each year into a Lifetime ISA and continues to do so until the age of 30. Over those 13 years, they would have contributed £13,000 of their own money.

With the 25% government bonus, they would have received an additional £3,250, giving them a total of £16,250, not including any interest or investment growth. This could be a vital stepping stone toward a deposit for a first home, especially when combined with other forms of savings.

Now let us look at the same individual saving £1,000 per year from age 18 to age 50 and leaving the money untouched until they reach 60. Over the course of 32 years of saving, they would have contributed £32,000 and received £8,000 in government bonuses.

By the time they reach 60, assuming some modest investment growth over the years, the total value of their Lifetime ISA could potentially exceed £50,000. This would provide a welcome tax-free supplement to their retirement income.

Finally, consider a scenario where the same individual chooses to maximise their contributions, saving the full £4,000 each year from age 18 to age 30. Over 13 years, they would invest £52,000 and receive a government bonus of £13,000, resulting in £65,000 before any interest or growth. This sum could make a substantial contribution toward purchasing a first home, especially in high-value areas.

If they instead left the money until age 60, and contributed £4,000 annually until age 50, they would have saved £132,000 and gained £33,000 in bonuses, a total of £165,000, excluding any additional investment performance.

Helping Your Children Plan for Their First Home

For parents thinking ahead to support their children in buying their first home, a Lifetime ISA can be an excellent way to give them a financial head start. By beginning early and using a structured savings strategy, you can help your child gradually build a meaningful deposit for their future property purchase.

Start with a Junior ISA (JISA)

If your child is under 18, you can open a Junior ISA (JISA) in their name — a tax-free savings account that allows you to contribute up to £9,000 per tax year. All interest and gains within a JISA are free from tax, and when your child turns 18, the account automatically converts into an adult ISA.

Moving to a Lifetime ISA at 18

At 18, your child can open a Lifetime ISA (LISA), designed to help young adults save for their first home or retirement. The LISA allows contributions of up to £4,000 per tax year, with a generous 25% government bonus added to the amount saved — meaning an extra £1,000 for every £4,000 invested.

An Example: From JISA to LISA — Building a Deposit by 33

Let’s consider a scenario where a parent starts saving early for their child:

From age 5 to 17, the parent contributes £750 per year into a JISA for 13 years.
At age 18, the JISA converts to an adult ISA.
ISA savings can then be transferred to a LISA at a maximum of £4000 each year. Any transfers into a LISA will count towards the £4,000 Annual LISA limit.
From age 18 to 33, the child (with or without parental help) contributes £4,000 per year into a LISA to maximise the government bonus.

Assuming a steady 3.5% annual interest rate compounded yearly, here’s how the savings would grow:

Age	Account Type	Annual Contribution	Cumulative Contributions	Government Bonus	Interest Earned	Total Value
5–17	JISA	£750	£9,750	N/A	~£2,860	~£12,610
18–33	LISA	£4,000	£64,000	£16,000	~£21,240	~£101,240

Total saved by age 33: around £101,240

This total combines:

£9,750 saved via the JISA
£64,000 in LISA contributions
£16,000 in government bonuses
and around £24,100 in compounded interest at 3.5%*

This could provide a substantial deposit for a first home, particularly when combined with potential mortgage options, other savings, or additional family support.

*Bank of England base rates and ISA interest rates fluctuate over time. The example provided assumes a steady 3.5% annual interest rate for illustrative purposes only.

Why Professional Advice Matters

While these examples show the clear advantages of the Lifetime ISA, it is important to remember that everyone’s financial circumstances are different. Your income, saving priorities, and long-term goals should all be taken into account when deciding how best to use a Lifetime ISA.

At Lonsdale, our qualified financial advisers take the time to understand your individual situation and offer tailored guidance. We can help you decide whether a Lifetime ISA fits with your wider financial strategy, compare it with other tax-efficient options such as pensions, bonds or stocks and shares ISAs, and assist with selecting appropriate investment strategies if you choose a stocks and shares version of the account.

We are also here to provide peace of mind, ensuring you are aware of any potential pitfalls, such as the early withdrawal charge, and making sure you remain compliant with HMRC rules and allowances.

Saving for retirement or buying your first home is an exciting and meaningful step in life, and our role is to support you every step of the way with friendly, professional and fully regulated financial advice.

Start Planning Today with Lonsdale

Whether you are just beginning your financial journey or looking to make the most of your existing savings, a Lifetime ISA could be a valuable part of your long-term plan.

At Lonsdale, we are here to help you build a future that works for you, with personalised advice that takes the confusion out of saving for retirement or saving to buy your first home.

For more information or to speak to one of our experienced financial planners, get in touch with us today.

Please note:

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. The Financial Conduct Authority does not regulate tax planning.

Sources: gov.uk, fca.org.uk, moneyhelper.org.uk

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