The government has announced a significant overhaul of the Lifetime ISA (LISA) scheme, scrapping a punitive withdrawal penalty that has cost thousands of UK households an average of £790. This move marks a major shift in support for first-time buyers, who will no longer face financial penalties when accessing their savings under changing circumstances.
End of the £790 Penalty Charge
Under the current Lifetime ISA rules, savers receive a 25% government bonus of up to £1,000 annually when saving for their first home or retirement. However, withdrawing funds for any other reason triggers a harsh penalty of 6.25%, which has resulted in substantial losses for many. In the 2024-25 tax year alone, a staggering 129,000 LISA savers were hit with penalty charges averaging £790 each, highlighting the widespread impact of this restrictive policy.
New Product to Replace Lifetime ISA
The Labour Party government is actively developing a replacement for the Lifetime ISA, designed specifically to support first-time buyers without imposing penalties for withdrawals. A Treasury spokesman confirmed that consultations are underway for this "new and improved product," which aims to provide greater flexibility and fairness for savers. This initiative responds to growing criticism of the LISA's strict limits and punitive withdrawal charges, which have been deemed unfair by financial experts and consumers alike.
Expert Reactions and Financial Implications
Rachael Griffin, a tax and financial planning expert at Quilter, welcomed the change, stating that charging people for accessing their own money when circumstances change has always felt unjust. She emphasised that careers, relationships, and housing plans often evolve over time, making rigid savings penalties inappropriate. However, Griffin also cautioned that if bonuses are only paid at the point of purchase, savers might miss out on years of potential investment growth on that money, requiring clear communication from providers.
Rachel Vahey, head of public policy at AJ Bell, noted that the new product will likely resemble the now-scrapped Help to Buy ISA, offering a more user-friendly approach for first-time buyers. Meanwhile, David Hollingworth, associate director at L&C Mortgages, urged officials to review the maximum house purchase price under such schemes, arguing it is overdue for an update as it currently limits buyers in certain high-cost areas of the UK.
Broader Impact on Household Savings
This policy change is expected to benefit thousands of households across the UK, providing much-needed relief from financial penalties and encouraging more flexible saving for homeownership. By eliminating the withdrawal penalty, the government aims to make saving for a first home more accessible and less risky, particularly for younger savers facing uncertain economic conditions. The move aligns with broader efforts to address housing affordability and support economic mobility, though experts stress the importance of ensuring the new scheme offers competitive returns and clear guidelines to avoid unintended consequences for savers.
