The government has announced significant changes to the Lifetime ISA (LISA), with plans to scrap the retirement savings option entirely as part of a major overhaul of the popular savings product. According to Treasury officials, the new version will focus exclusively on helping first-time buyers get onto the property ladder, marking a fundamental shift from the current dual-purpose account.
Key Changes to the Lifetime ISA Structure
Under the proposed reforms, the government's 25 per cent bonus will no longer be paid on a monthly basis. Instead, savers will receive the bonus as a single lump sum payment when they complete the purchase of their first home. This change means that investors will miss out on the compound interest and investment returns that would have accumulated over the duration of their savings journey under the current system.
A Treasury spokesperson confirmed to The Telegraph that consultations are underway for "a new and improved product, specifically designed to support first-time buyers and without penalty for withdrawals." While the withdrawal penalty will be eliminated in the new product, questions remain about whether the property value threshold will be adjusted to reflect current market conditions.
Current LISA Rules and Limitations
The existing LISA model, launched in April 2017, allows individuals aged 18 to 40 to contribute up to £4,000 tax-free annually toward either a first home purchase or retirement savings, with a maximum lifetime contribution of £20,000. The government adds a 25 per cent tax-free bonus to these contributions, creating an attractive savings incentive for younger investors.
Current regulations permit withdrawals for properties valued under £450,000 or for retirement purposes once the saver reaches age 60. However, unauthorised withdrawals or purchases above the property cap trigger a substantial 25 per cent penalty on the total amount withdrawn, effectively costing savers 6.25 per cent of their own hard-earned money.
London's Property Price Challenge
While the LISA has proven beneficial for homeowners across most of the country where average property prices remain below the £450,000 threshold, Londoners have faced particular difficulties since the scheme's introduction. The capital's soaring property market has consistently exceeded the scheme's ceiling, with Rightmove data showing average London property prices reaching £661,000 in December.
This price cap has created controversy in London, placing those who attempt to use LISA funds for more expensive properties in increasingly strained financial situations when they face penalties. Many London residents have simply stopped contributing to their accounts after realising the scheme offered limited benefits in the capital's premium property market.
Calls for London-Specific Solutions
The Treasury Committee released a comprehensive report last year highlighting several issues with the LISA, particularly focusing on the problematic 25 per cent penalty for unauthorised withdrawals. This prompted government acknowledgment of the account's importance, with Chancellor Rachel Reeves confirming in the Autumn Budget that consultations would begin in 2026.
Financial advisers and estate agents have increasingly called for a separate London-specific LISA product that would reflect the capital's unique property market conditions. Such a tailored approach would allow London investors to utilise their savings without fear of losing capital through penalties when purchasing properties above the current national threshold.
The existing LISA model will remain available until the new product launches in April 2028, giving current account holders time to adjust their financial strategies and consider how the changes might affect their long-term savings goals and property aspirations.
