Who is the Lifetime ISA for?
Lifetime ISAs have been the focus of policymakers’ considerations as they consider how to reform and simplify the UK’s savings landscape.
In January, the Treasury Committee called for evidence from industry on whether the Lifetime ISA remains fit for purpose nine years after its creation. It has asked how the product could be reformed or if it should even be abolished.
Savers can use Lifetime ISAs to buy their first home or to save for later in life.
To open one, they must be 18 years old but under 40.
Money can only be withdrawn from a Lifetime ISA without incurring a penalty when buying a first home costing up to £450,000, if the saver is at least 60 years old, or is terminally ill with less than 12 months to live. Savers will pay a withdrawal charge of 25 per cent if withdrawing for any other reason.
The product forms part of the annual ISA limit of £20,000, and users of Lifetime ISAs can add up to £4,000 annually until they are 50.
The government, meanwhile, will contribute a 25 per cent bonus to contributions up to £1,000 per year.
This bonus is not available, however, if the property’s value exceeds £450,000 or if it is not being bought with a mortgage.
If buying as a couple, both parties need to be first-time buyers to secure the bonuses.
“The Lifetime ISA is handy for younger people who are saving for retirement and have maxed out their pension contributions for the tax year, or who are looking to get onto the housing ladder”, says Michaela Pashley, chartered financial planner at Roseum Financial Planning.
Government should increase the limit
AJ Bell chief executive officer Michael Summersgill told CityAM in January that he expected the broader ISA landscape to be simplified this year. Labour’s sole reform to the ISA regime in its October budget was its scrapping of plans for a British ISA, which was launched by the previous Conservative government earlier in 2024.
For now, the Lifetime ISA confers tax advantages for savers thinking about their latter years. The product “could complement their existing retirement planning as you can withdraw the money from age 60 without paying any taxes”, says John Phillips, independent financial adviser at AAF Financial.
Lifetime ISAs were primarily designed to help young people get onto the housing ladder. But as housing prices continue to soar—particularly in London—limiting the product’s use to buying first homes worth up to £450,000 may justify a rethink.
“I definitely think they need to increase it,” says Joe Akik, wealth manager at Capital Planning Partners.
“London property is just crazy, and that needs to be reflected in this,” he continues. “Although it probably is fit for purpose, I think it just needs a little bit of tweaking”.