In a significant move for aspiring homeowners, the government has confirmed a potential overhaul of the Lifetime ISA (LISA) following the recent Budget. Official documents reveal that a new consultation will be launched in early 2026, which could lead to the product being scrapped and replaced.
What is the Lifetime ISA and how does it work?
The Lifetime ISA is a specialised savings account designed to help people get on the property ladder or save for retirement. For every pound you save, the government adds a 25% bonus. Savers can deposit up to £4,000 each tax year, meaning the maximum annual bonus is £1,000.
However, the scheme comes with strict rules. The funds can only be accessed without penalty to buy a first home or after the age of 60. If you withdraw the money for any other reason, you face a hefty 25% withdrawal charge.
The problem with the current Lifetime ISA rules
This penalty is a major point of contention. It doesn't just reclaim the government bonus; it also takes a chunk of your original savings. For example, if you saved £4,000, your pot would grow to £5,000 with the £1,000 bonus. A withdrawal for a non-qualifying reason would incur a 25% charge on the full £5,000, which is £1,250. This would leave you with only £3,750 from your initial £4,000 investment.
Another critical issue is the £450,000 property price cap. This limit has remained unchanged since the LISA's launch in 2017, failing to keep pace with soaring house prices, particularly in London where average property values frequently exceed this threshold.
Expert calls for change
Consumer champion Martin Lewis had been urging the government to reform the LISA. Ahead of the Budget, he highlighted the unfairness of the penalty for those buying a property above £450,000, calling it an "effective fine of 6.25% of your money to the state."
He predicted one of two likely outcomes: either the government removes the penalty for buying a more expensive property (allowing savers to reclaim their original deposits without the bonus), or it increases the price threshold to around £500,000 to account for inflation since 2017.
The upcoming 2026 consultation will now determine the future of this savings scheme, potentially leading to a new product better suited to the modern housing market.
