A change to Lifetime ISA withdrawal rules announced in the 2026 Budget has come into force immediately, affecting anyone buying a property worth more than £450,000.
Chancellor John Healey confirmed the measure in Wednesday's Budget, saying he was "dealing with the LISA penalty, so that if the home you want costs more than the limit, you will get back at least what you put in". The change officially came into force at midnight on October 29.
New 20% withdrawal charge
Under the previous rules, first-time buyers using Lifetime ISA funds to purchase a property costing more than £450,000 had to pay a 25 per cent penalty on their withdrawal. The new rules reduce this charge to 20 per cent, which recovers the government bonus while allowing savers to keep their own contributions.
A Lifetime ISA can be used either to buy a first home or to save for retirement. Savers can contribute up to £4,000 each year, with the government adding a 25 per cent bonus up to a maximum of £1,000 per year.
Government rationale
Government documents state that reducing the withdrawal charge to 20 per cent "will make the treatment of these withdrawals fairer by allowing affected savers to retain their own contributions while preserving the principle that the government bonus is available only for qualifying purchases within the scheme rules".
People withdrawing Lifetime ISA funds for reasons other than buying a first home or retirement will still face the 25 per cent penalty. Purchases of properties below £450,000 do not attract any withdrawal charges.
Future ISA changes
The chancellor also confirmed that the Lifetime ISA will be replaced by a new First Time Buyers ISA from April 2029. The new product will allow contributions of up to £4,000 a year, in line with the Lifetime ISA, and provide a 25 per cent bonus subject to an overall maximum of £20,000.
Mr Healey's Budget also outlined a new scheme for first-time buyers called Your First Home. The £4.7 billion scheme aims to help around 70,000 households in England, providing 20 per cent equity loans with income caps of £110,000 per household outside London and £140,000 inside London. Price caps will be set based on local authority median prices, with inner and outer London caps of £650,000 and £500,000 respectively.
