A Lifetime ISA account (LISA) can be an attractive option for those saving for a first home or retirement. Its main appeal: the government adds a 25% bonus to contributions of up to £4,000 per year, but the money can only be accessed to buy a first home or from the age of 60 – limitations that might not make it the best choice for everybody.
For example Simon (not his real name), an NHS doctor with an active LISA account, was attracted to the vehicle by the government boost but already owns a flat in London on which he is paying a mortgage.
This means the primary benefit of the LISA – supporting first-time home buyers – does not apply in his case. As such the money is entirely destined for retirement planning. However, the LISA has specific rules regarding withdrawals, noted Natalie Kempster, chief client officer at Argentis Group.
“Accessing the funds before the age of 60 incurs a 25% penalty on the total amount withdrawn, including the government bonus. This effectively negates the bonus and also erodes some of his own contributions,” she said.
He has £10,000 in his LISA plus the £2,500 bonus (£12,500 total). If he were to withdraw this before age 60 for anything other than a first-time home purchase, the 25% penalty (£3,125) would be applied to the total amount, leaving him with only £9,375 – less than his initial contribution.
Simon should not therefore withdraw his money from the LISA but should also stop putting more in, despite having relatively low expenses planned for the foreseeable future and a long-term, high-risk and sustainability-aware approach to investing.
Given his situation, the restrictive access rules and penalty structure of the LISA make it less advantageous to keep adding money to it in this scenario, according to Kempster.
“He might be better served by focusing on maximising his ISA allowance, which offers more flexibility in terms of access and investment choices. The Treasury announced a review of LISAs in January 2025, so future changes are possible, but for the time being, the current rules make the LISA less suitable. I’d probably recommend waiting until the consultation has completed,” she said.
Ruairi Dennehy at Dennehy Wealth agreed. If Simon wants to save money for retirement, setting up a self-invested private pension (SIPP) would be “far more beneficial” to him.
“I would mainly recommend a SIPP due to the fact he can contribute up to £60,000 per year (and the ability to look back three previous tax years to make use of these allowances as well) rather than just £4,000 per year into the LISA,” he said. “He will also receive more from the government to do so as well via tax relief, rather than just the maximum £1,000 LISA bonus.”
As Simon earns approximately £160,000 per annum, he will receive 20% immediately via basic rate tax relief on any contributions, as well as an additional 25% tax relief when submitting his self assessment, Dennehy calculated. Therefore every £100 contributed into his SIPP would only cost him £55.
“Given the fact there are high exit penalties from withdrawing from a LISA early, I would keep the LISA open, but begin redirecting future monthly savings to his existing ISA account or a new SIPP,” Dennehy concluded.
Simon has £400,000 left to pay on his mortgage, fixed at 4.05% for the next five years. Yet, overpaying on the mortgage should be secondary to maximising the £20,000 ISA allowance, both planners agreed.
Most lenders allow homeowners to overpay a certain amount on the mortgage each year without penalty (usually 10% or less), known as overpayment allowance. Dennehy recommended Simon to check what his allowance is before making any decisions.
“If he can create an easy monthly savings-and-expenditure plan to see if there is some excess income each month that he could tuck away into his ISA, then we would always encourage that,” he said. “We aren’t guaranteed the £20,000 annual allowance forever so make use of it if you can.”
The distinction between investing and repaying a mortgage is mostly psychological according to Kempster: for many, the goal is to be mortgage-free, while for others, retiring early is the priority.
“Overpaying the mortgage offers the advantage of reducing the principal balance faster, which can lead to significant interest savings over the long term,” she noted. "For example, a £40,000 lump sum payment could potentially save him £44,560 in interest, assuming he has another 20 years on his mortgage – that's the magic of compounding".
On the other hand, maximising ISA contributions would allow him to invest in a tax-efficient environment. While investment returns are not guaranteed, they could potentially exceed the mortgage interest rate over the long term.
“I would consider that, whilst he will benefit from an excellent NHS pension, he won’t be able to access it until he is 57 (at the earliest) and then at a cost of long-term income. Therefore, he might want to boost up his ISAs to allow for a tax-free income at some point in the future,” she said.
“What we can be sure of is that there will be changes to the tax system between now and retiring (at least judging by the past few years), so it’s worth doing a bit of both and not committing to an all-or-nothing approach on anything.”