Lifetime ISA shake-up: Government to scrap retirement option as new first-time buyer scheme emerges

The Lifetime ISA (LISA), once hailed as a cornerstone savings product for young Britons, is set to undergo its most significant transformation since its launch in 2017. Under sweeping reforms being developed by the Treasury, the option to save for retirement through a Lifetime ISA will be scrapped, with the replacement product refocused exclusively on first-time home buyers.

The changes form part of a broader effort by the government to simplify the UK’s ISA system, but critics warn the reforms risk stripping away many of the features that made the Lifetime ISA one of the fastest-growing savings vehicles in the country.

Retirement Saving via Lifetime ISA to Be Removed

According to Treasury plans, the replacement for the Lifetime ISA will no longer allow savers to use the account for retirement, ending a key benefit relied upon by younger workers and the self-employed. Instead, the new product will be designed solely to help first-time buyers purchase a home, narrowing its scope considerably.

A Treasury spokesperson confirmed the government is consulting on a “new and improved product”, tailored for first-time buyers and designed to allow withdrawals without penalty. However, removing the retirement option means savers who previously used the LISA as an alternative or supplement to a pension will need to reassess their long-term financial planning.

Government Bonus to Be Paid Only at Point of Purchase

One of the most controversial elements of the overhaul is the decision to delay the 25 per cent government bonus. Under the new system, the bonus will no longer be paid annually or monthly into savers’ accounts.

Instead, it will be issued as a single lump sum at the point of buying a first home.

This shift removes the opportunity for savers to earn interest or investment returns on the government bonus over time, significantly reducing the power of compound growth. Investment experts argue this undermines one of the core incentives that encouraged younger people to start saving early.

Current Lifetime ISA Rules Explained

The existing Lifetime ISA, launched in April 2017, allows individuals aged 18 to 40 to contribute up to £4,000 per year, receiving a 25 per cent tax-free bonus worth up to £1,000 annually.

Funds can currently be used to:

• Buy a first home valued up to £450,000, or
• Save for retirement from age 60

Withdrawals made for other reasons trigger a 25 per cent penalty, meaning savers lose not only the government bonus but 6.25 per cent of their own money.

The current model will remain available until April 2028, when the replacement product is expected to launch.

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London Property Prices Expose Flaws in the Lifetime ISA

The £450,000 property cap has long been criticised, particularly in London and the South East, where average house prices far exceed the threshold. Data from Rightmove shows the average London property price reached £661,000 in December, rendering the LISA ineffective for many buyers in the capital.

As a result, thousands of savers have either stopped contributing or faced penalties after discovering their LISA savings could not be used without financial loss. Financial advisers and estate agents have repeatedly called for a London-specific Lifetime ISA, though it remains unclear whether the government will adjust the property cap under the new scheme.

Critics Warn Reforms Could Undermine Investment Culture

Investment commentators have criticised the reforms as anti-investment and anti-growth, arguing that delaying the bonus reduces long-term returns and removes billions from UK markets.

With more than 1.6 million Lifetime ISAs currently open, critics estimate the changes could prevent over £20 billion from being invested over time. The removal of the retirement option also disproportionately affects the self-employed, who often rely on LISAs as a flexible alternative to pensions.

What Happens Next for Lifetime ISA Savers

The government has confirmed that existing Lifetime ISA holders will retain their current benefits, with bonuses honoured under the original rules. However, new savers may face a very different product once the replacement launches in 2028.

A formal consultation is expected in 2026, with details on property caps, bonus structure, and eligibility yet to be finalised.

FAQ

Is the Lifetime ISA being scrapped?

No, but it is being significantly overhauled. The current Lifetime ISA will remain until April 2028, after which a new product will replace it.

Will I still be able to save for retirement with a Lifetime ISA?

No. Under the proposed reforms, the retirement savings option will be removed, and the product will be limited to first-time home buyers.

What happens to the 25 per cent Lifetime ISA bonus?

The bonus will still exist but will be paid as a lump sum at the point of purchasing a home, rather than being added annually.

Will existing Lifetime ISA holders lose their benefits?

No. The government has confirmed that current savers will keep their existing terms, including annual bonuses.

Is the Lifetime ISA still worth opening now?

Many experts argue it remains valuable before 2028, as current rules still apply and bonuses are paid upfront.

Will the property price cap change?

It is currently unknown whether the £450,000 cap will be adjusted, despite widespread criticism.

Why are critics unhappy with the reforms?

Critics say delaying the bonus removes the benefits of compound interest, reduces investment in UK markets, and disadvantages the self-employed.