Mortgage Retirement

Benefits and Drawbacks of a Lifetime ISA For Your Pension

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Lifetime ISAs are government products that help you to either save for your first home or for your retirement. You can save money in your ISA and the government will contribute an additional 25% on top of what you have saved, up to a maximum of £1000 per year. You can also benefit from interest built into the account.

Let’s have a look at some of the benefits and drawbacks of lifetime ISAs, specifically for those of you interested in opening one for your retirement savings. Whilst they don’t suit everyone, it can be a great option for many people.


Substantial Free Cash Payout From The Government

The most obvious benefit of the lifetime ISA is that when you withdraw the money, you will have gained a government bonus of 25% on top of what you have saved. For example, if you open the account at 18 and save the full £4000 a year, by the time you stop saving at 50, the government will have contributed £33,000 to your ISA. The ISA provider will then also offer competitive interest rates that will steadily build as you save. Whilst interest rates in other savings accounts can waver, you know that you will secure that 25% bonus on whatever you contribute that month up to the £4000.

Tax-Free Interest and Returns

Another huge benefit that makes the lifetime ISA stand out is that it is a tax-free savings account. You won’t pay any tax on the bonus from the government, the interest you accrue, or on any money when you withdraw the savings at the age of 60. Usually, a pension that is paid to you by your employer is considered as income so can be taxed. This is also the case when you withdraw from private pensions. The amount of money you could potentially save as a result of this is monumental in the long run.

Can Be Used For House and Retirement

If you decide to use the lifetime ISA in order to purchase your first house, you can continue to save in the account until you are 50 for your retirement. After you withdraw some, or all, of the money you have saved for your house along with the bonus, you can continue to save and receive the government bonus up until you’re 50.

Bonus Added Monthly

With other ISA’s, such as the Help To Buy, the bonus from the government is only added once you are ready to withdraw the money to buy your first house. So, the only interest that is built is from the money you have saved. Whereas with the government bonus for the Lifetime ISA, it is added monthly, meaning you will be able to benefit massively through compound interest. Also, you know exactly how much you have saved without having to worry about doing the calculations.

Considered To Be Low Risk

If you’re not a risk-taker, the lifetime ISA is a really good option, as it is a government product so is considered to be relatively low risk. The first £85,000 in your lifetime ISA is fully protected by the FSCS in the event of a bank collapse and you know that you will consistently benefit from the 25% government bonus, regardless of any downturns in the economy. You can have confidence in the fact that you will steadily earn interest and benefit from the bonus throughout your life.

You Can Still Have Other ISA’s

For those of you who aren’t yet homeowners, but also want to save for your pension at the same time, you can have multiple ISAs open that you can pay into at the same time. The maximum amount of money that you can invest in your ISAs combined is £20,000. So, if you have saved £2,400 in your help to buy and £4,000 in your lifetime ISA, you could still save £13,600 in other ISAs that year, such as stocks and shares ISAs or innovative finance ISAs. If you save as much as you can up to the maximum in various ISAs, your return on investment will be fantastic.


Can’t Withdraw Until You’re 60 Without a Penalty

Until you reach the age of 60, you can’t withdraw money from your Lifetime ISA without incurring a withdrawal penalty. Unless you are terminally ill or are buying your first home, removing the money from your account at any time before the age of 60 will mean that you will incur a 25% exit fee.

The charge is currently 20% as a remedy to financial issues as a result of the pandemic, meaning you won’t lose any of the money you initially invested, only the government bonus. When it returns to 25% on the 6th April 2021, you will have to pay back the government bonus plus some of the money you invested. This exit fee was implemented to encourage people to use the ISA to save money for their retirement, so if you struggle with not spending your savings, this is a good option for you.

Still Taxable As Part Of Your Estate

If you die before the age of 60, there is no penalty fee for your beneficiaries when the money is withdrawn. However, the money will no longer be tax-free, so it will be taxed as part of your estate. Whilst this might not necessarily be a drawback as this is normal practice, it is important to know when you are creating your will that the money is no longer tax-free after you die.

Less Substantial Returns Than Alternative Investments

For the risk-takers out there, this is not necessarily the best investment. The slow and steady build-up of the bonus and interest may not be substantial enough for what you’re wanting to achieve. For example, the returns when investing in residential real estate or buying a commercial property for sale can be much more substantial as a result of the risk and large initial investment involved. If you’re wanting to take a risk, still consider a lifetime ISA as a more secure additional investment, alongside something potentially less consistent.

Max Monthly and Yearly ISA Limit

If you are wanting to invest a substantial amount of money upfront, a lifetime ISA is unlikely to be suitable. The maximum yearly investment allowed is £4,000, making it perfect for people wanting to gradually save, but not for those wanting to invest more.

Additionally, there is a yearly ISA limit of investing no more than £20,000 into all of your ISAs combined, as discussed previously. This is something to consider if you are wanting to invest more into other ISAs before setting up a lifetime ISA.

You Can Only Benefit Until You’re 50

The government will only contribute the 25% bonus to your investment until you are 50. After this, your ISA will continue to build interest on the sum that is already in the account, but you cannot pay in any more money, nor will you gain the government bonus. This can be frustrating for people, so understanding that this is a part of the process is important before investing.

Need to Open Between The Ages of 18 and 39

You are unable to open a lifetime ISA unless you are between the ages of 18 and 39, so will be unsuitable for anyone not in this age bracket. Even if you do open an account when you are 39, you still have at least 10 years of savings time, meaning you could benefit from an extra £10,000 if you are in a position to invest the maximum £4,000 a year.

Best Lifetime ISA Providers (As Of November 2020)

Nottingham Building Society

You will receive 1.05% AER variable interest on top of the government bonus and you only need £10 to open the account. If you’re between 18 and 39, you can transfer to Nottingham Building Society from another Lifetime ISA provider when creating a new online account.


Moneybox will pay 1.1% interest with a bonus of 0.6% in the first year. You also only need to invest £1, so if you aren’t sure if you are ready to commit to a large investment yet, this is perfect. You have to use the app to open this account as well as manage it, so if this isn’t something you’d be interested in, it will be worth opting for the Nottingham Building Society ISA instead.


There are plenty of benefits to opening a lifetime ISA, as well as drawbacks for particular people. For 18 to 39-year-olds who are not looking to make an overly substantial investment, but want to save for their future, this is definitely something to look into. Lifetime ISAs should not be the only pension savings you have, so you shouldn’t stop paying into your other pensions. Most employers will match your pension contributions into a workplace pension so that is definitely worth continuing.

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Editorial Disclaimer: The editorial content on this page is not provided by any of the companies mentioned and has not been endorsed by any of these entities. Opinions expressed here are author's alone

The content of this website is for informational purposes only and does not represent investment advice, or an offer or solicitation to buy or sell any security, investment, or product. Investors are encouraged to do their own due diligence, and, if necessary, consult professional advising before making any investment decisions. Investing involves a high degree of risk, and financial losses may occur.

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Daisy Moss is a freelance writer specializing in business, investment, and real estate. When she's not writing, you'll probably find her reading a good novel!

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