Ok, I've had a few different phone contracts in my time (although non of them have been with Carphone Warehouse).
Whenever I have cancelled a contract I have had to submit 30 days notice, In writing, to the accounts / customer service department. The address will usually be on the back of the bill. Your best bet is to give them a call (
Contact Details) on the customer service number to find out what the actual policy is. You will also probably need to give the lifeline people a call to establish how you go about cancelling that.
As for the phone, the handset is yours and you should be free to use that however you want to. You may find that it has been "locked" to whatever network you are currently using (Vodafone, Orange etc) and it will only work if a sim card for that network is installed. Carephone Warehouse should be able to assist you in unlocking it in the event that you wish to transfer to a different network or you may wish to simply purchase a new handset. The sim card will be deactivated once your account has been cancelled and you cannot transfer it to a pay as you go (PAYG) service. You will need to either buy a new handset that comes with a PAYG sim or you can simply buy a PAYG sim pack from most mobile phone retailers and then use that in your existing handset (not withstanding the issue with it being locked to a certain network as mentioned above).
Like I say, best bet is to give customer service a call and ask, in fact the guys instore should be able to give you the information you need as well.
HTH