Everything you need to know if you’re contributing to a child’s Lifetime ISA this year

Read our blog to find out everything you need to know if you’re contributing to a child’s Lifetime ISA in 2025

Introduced back in April 2017, the Lifetime ISA (LISA) is designed to help first-time buyers onto the property ladder. Open to savers and investors aged 18 to 39, contributions to a LISA are eligible for a 25% bonus from the government.

LISA funds must be used to help with the purchase of a first home (or be accessed after the age of 60) and strict penalties apply when these rules are broken.

In fact, Professional Adviser reports that these penalties are so harsh, that some savers have been charged more than £11,000 on their LISA withdrawals.

If you plan to make 2025 the year you help your child onto the property ladder, you’ll need to be aware of the rules and be sure that your loved ones are too.

Keep reading to find out more.

The 25% LISA bonus makes them an attractive choice for those saving toward a deposit for a first home

Under current rules, a LISA can be opened by any UK resident aged 18 to 39. As with other ISA products, savers can opt for a Cash or a Stocks and Shares LISA and an annual subscription limit applies. For 2024/25, this limit is £4,000.

An annual government bonus of 25% is added to each contribution, meaning that you can save up to £5,000 each year. Contributions can only be made up to the age of 50, at which point the bonus also ceases.

A saver who took out a LISA aged 18 and contributed the current full LISA allowance each year, would amass £33,000 in government bonuses alone by the time they reached 50.

But the accumulated fund must be used to help buy a first home. If you don’t intend to use it for this purpose, you’ll need to wait until you reach age 60 to make withdrawals; otherwise, a 25% charge will apply.

The way the charge applies means that you could end up withdrawing less than you put in. The size of some charges, meanwhile, has led to calls for the rules to be changed.

The 25% charge has seen savers pay huge penalties of up to £11,000

On the face of it, a 25% withdrawal might appear to simply counteract the 25% government bonus, but in reality, the charge is higher than it seems. While the 25% bonus is applied to contributions, the withdrawal fee is levied on your full LISA amount.

If you have £25,000 saved in a Cash LISA, say, this comprises £20,000 of your contributions, plus a £5,000 government bonus. A withdrawal outside of the strict LISA rules, though, will see you charged 25% of the full £25,000, or £6,250.

From your £20,000 contributions, you’ll receive just £18,750. This significant reduction is why many industry professionals are calling for a change to the rules.

Charges can be significant and they are on the rise, with more LISA holders falling victim

Professional Adviser confirmed last year that LISA withdrawal charges for 2023/24 topped £75 million, a 40% increase on the previous year (£54 million).

The report confirms that a total of £2.4 billion was saved into LISAs during that next year. While 56,900 people used their LISA to purchase their first home, 99,650 made unauthorised withdrawals during the same period and so became liable for a charge.

As we have seen, unauthorised payments include withdrawing money before the age of 60 that is not put towards the purchase of a first home.

But other caveats apply too. It’s important that you and your loved ones are well aware of these before you begin contributing. A LISA can be used to help buy a first home only if:

• It is bought with a mortgage and the purchase is made via a conveyancer or solicitor
• The purchase is made at least 12 months after the first LISA contribution is made

• The house costs £450,000 or less.

If your loved one is looking to make a quick purchase or they plan to buy a home that costs more than £450,000, they could lose out. The Guardian reports that for the first half of 2024, the average first-time purchaser in London spent £443,550.

Seek advice to ensure you or your loved ones don’t lose out

Before taking out a LISA it’s important to think carefully about when a house purchase might be made and how much that house might cost. Think about the best type of LISA – Cash or Stocks and Shares – for you or your loved one’s circumstances.

Failing to use a LISA in line with its rules could see a hefty charge levied so be sure to seek professional financial advice before making a decision.

Get in touch

To learn more about contributing to a child’s Lifetime ISA and broader advice, email us at advise-me@fosterdenovo.com or call us on 0330 332 7866.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority.

Registered Office: Foster Denovo Limited, Ruxley House, 2 Hamm Moor Lane, Addlestone, Surrey, KT15 2SA.

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.

Investments do not include the same security of capital which is afforded with a deposit account.

Your home may be repossessed if you do not keep up repayments on your mortgage.

By incurring a Lifetime ISA Government withdrawal charge you may get back less than you paid in.

Saving in a Lifetime ISA may affect your entitlement to current and future means tested benefits.