Is the Lifetime ISA still an effective planning tool? Here’s what you need to know

When you’re thinking of ways to help your child save for their future, the vast number of options available can often make it challenging to decide which would best suit their needs.

One of these options could be a Lifetime ISA (LISA), a government-backed savings account.

You may have seen headlines recently where several financial commentators have criticised the LISA, questioning whether it remains fit for purpose.

Though, figures from AJ Bell show that they’re still incredibly popular, with total savings reaching £2.4 billion in 2022/23 – a 43% increase from the previous year.

With that in mind, continue reading to discover some of the benefits and downsides of LISAs so you can decide whether they would help your child effectively accumulate wealth for the future.

The LISA helps your child save and invest while receiving a bonus on contributions

LISAs are available to anyone between the ages of 18 and 39 to help them save towards the deposit for their first home.

Your child or grandchild can save up to £4,000 each tax year in a LISA, which counts towards their overall ISA allowance (£20,000 in 2024/25).

So, for example, if they contributed the full £4,000 to their LISA in the 2023/24 tax year, they could only save a further £16,000 into their other Cash or Stocks and Shares ISAs.

Better yet, the government essentially “tops up” any LISA contributions your children make by 25%, up to a total of £1,000 each year.

While your child could only open one up until their 40th birthday, they can continue to contribute to their LISA until they reach the age of 50.

Your children aren’t limited to a typical savings account, either. While there are Cash LISAs that work much like savings accounts, they could also invest in a range of securities through a Stocks and Shares LISA.

As is the case with other forms of ISA, a LISA provides tax-free growth, meaning any wealth accumulated is free from Income Tax, Dividend Tax, and Capital Gains Tax.

However, if they don’t use the funds to purchase their first home, they need to keep them saved or invested until they reach the age of 60; otherwise, they will face a 25% penalty on unauthorised withdrawals.

Moreover, your children could transfer wealth held in their LISA between providers until they reach the age of 50. This won’t be counted as a payment into your LISA, either, so you won’t use up any of your £4,000 allowance.

Your children might find the LISA rules particularly restrictive

Perhaps one of the main issues with LISAs, and partly the reason why so many commentators have questioned their use, is that they have strict rules surrounding withdrawals and how your children use the money.

Indeed, the aforementioned 25% penalty could leave your child or grandchild with less than they initially contributed if they need to withdraw the funds for any other reason.

For instance, if they took out £12,500 – £10,000 contributed with the added £2,500 bonus – they’d face an exit fee of £3,125 and receive just £9,375.

Even if they were planning to use their LISA to save for retirement, plans can change over the years. Your child or grandchild may find that they would be better off holding their money elsewhere, such as in a self-invested personal pension (SIPP) or one of their other ISA accounts.

Another significant restriction has to do with purchasing a property. A LISA can only be used to buy a home up to the value of £450,000, a cap that has stayed in place since April 2017.

The Guardian reveals that average UK house prices have risen by more than a third since then, meaning that the cap would now be above £600,000 if it had increased in line with this growth.

In many parts of the UK, particularly London, even smaller homes might exceed this cap, making the LISA impractical for many first-time buyers.

Your younger loved ones can only benefit from government bonuses until the age of 50, too. So, they may not benefit from enough years of top-ups to make it a worthwhile retirement-saving tool the closer they are to this age.

A Lifetime ISA could be suitable if you wish to help your children purchase a first home

While a LISA might not suit your own situation, it could make for an attractive choice for a child if you’re helping them save towards the deposit for their first home.

Indeed, you could encourage your child or grandchild to regularly contribute to their LISA as they progress through life, which might eventually help them get onto the property ladder.

You may also want to match their contributions as an added incentive, ensuring they take an active role in saving rather than relying solely on your financial support.

This, paired with the tax-free growth and the government bonuses, could help to instil positive financial habits that benefit them throughout their lives, all while helping them accumulate funds for their first home.

Get in touch

We could help you determine whether a LISA would be a good fit for your children or grandchildren.

If you or your loved ones would like financial advice, email info@douglaswhiteltd.com or call 0151 345 6828 to find out more.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only. All information is correct at the time of writing and is subject to change in the future.

The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.

All statements concerning the tax treatment and benefits are based upon our understanding of current tax law and HMRC practices both of which are subject to change in the future. Levels and bases of reliefs from taxation are also subject to change, and are dependent on your individual circumstances

If your LISA incurs a government withdrawal charge, you may get back less than you put in.

If you save in a LISA instead of enrolling in, or contributing to, a qualifying scheme, OPS or PPP, you may lose the benefit of contributions by an employer (if any) to that scheme, or it may affect current and future entitlement to means-tested benefits.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate tax planning.

Sources

AJ Bell article dated 1.10.24, using information from HMRC Commentary for Annual savings statistics September 2024.

The Guardian article dated 11.01.25