The Lifetime ISA is being replaced: what that means if you are saving for a first home
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Saving for a first home is a long game, and it does not help when the account you have been paying into starts turning up in the news under headlines about being scrapped. If you hold a Lifetime ISA, or you were on the point of opening one, the last few months will have been unsettling. The government has confirmed it is replacing the LISA with something simpler, and the natural question is whether there is any point carrying on.
Nothing has changed yet. The Lifetime ISA is still open, still paying its bonus, and anyone who already holds one can keep paying in under the existing rules. The direction of travel is clear enough to plan around, though.
What the Lifetime ISA still does
You can pay up to £4,000 into a Lifetime ISA each tax year, and the government adds 25% on top, so a full year's contribution attracts a bonus of up to £1,000. That £4,000 sits inside your overall ISA allowance, which is £20,000 for the 2026/27 tax year. You need to be between 18 and 39 to open one, you can keep contributing until you turn 50, and the money can go towards either a first home costing up to £450,000 and bought with a mortgage, or towards retirement from age 60. The account has to have been open for at least twelve months before it can be used for a purchase, which catches people out more often than you would think.
The part that causes the real trouble is the withdrawal charge. Take money out for any other reason and a 25% charge applies to the whole amount withdrawn, bonus included, so you can end up with less than you originally paid in. That is not a rare misfortune. In its consultation the Treasury noted that unauthorised withdrawal charges had reached 8% of all accounts opened in 2024-25, and that more people have lost a slice of their own savings to the charge than have used a LISA to buy a home.
What is replacing it
In June the Treasury published a consultation on a new First Time Buyer ISA, which will be offered in place of the Lifetime ISA once it is available. The design is deliberately simpler. It drops the retirement side entirely and exists only to help people buy a first home. It will be open to anyone aged 18 or over with no upper age limit, which reflects how much later people are buying now. Cash and stocks and shares versions are both planned. And the withdrawal charge goes, so you will be able to take your money out without penalty if your plans change.
The bonus will work differently, and that is the trade-off. Instead of arriving month by month, it will be paid as a single sum when you withdraw to buy, calculated on what you have paid in rather than on what the account has grown to. So the bonus will not be sitting in your account earning interest or investment returns along the way. The consultation closed in August, and several of the numbers that matter most are still to be set:
• How much you will be able to pay in each year
• The property price cap, which will be aligned across the old and new products
• The size of the government bonus
• When the new account will actually launch
Take Priya, 29, a fictional client whose position will be familiar to plenty of people saving for a first flat. She has been paying into a Lifetime ISA for three years, hopes to buy in around eighteen months, and is looking at places inside the price cap. For her the headlines are noise rather than a problem. She will almost certainly buy before any new product exists, and the twelve month rule is long behind her. Her brother, saving on a slower timetable and unsure whether he will buy at all, sits in a different position, and the withdrawal charge matters to him in a way it does not to her.
That is the distinction worth holding on to. The closer you are to buying, and the firmer that plan is, the more the Lifetime ISA still does the job it was built for. The further out you are, or the less certain, the more weight the withdrawal charge deserves in your thinking, and the more the flexibility of the replacement is likely to appeal.
A few practical points
If you already hold a Lifetime ISA you will not be able to transfer it into the new account, because the bonus on that money has already been paid. You will be able to hold both and put both towards the same purchase, and a couple who are both first-time buyers can still combine their accounts. You can only pay into one of the two in any tax year.
If you hold a stocks and shares version of either account, give some thought to your timescale. Investing can give a deposit more room to grow over a long stretch, but the value can fall as well as rise, and a market drop in the year you hoped to exchange could be a very large problem to have.
In summary
The Lifetime ISA is being withdrawn, but not yet, and not in a way that punishes people who already hold one. If you are close to buying, the account still does what it was designed to do. If you are further out, or your plans could change, the withdrawal charge is the thing to weigh, and the simpler product behind it may suit you better. The details that matter most have not been published yet.
If you are saving towards a first home and are not sure where these changes leave you, we would be glad to talk it through. Get in touch with the team at ACJ and we can look at how your deposit savings are set up and what your options are as the rules move.