UK households are being warned that time is running out to benefit from one of the country's most generous tax-free savings products. Consumer watchdog Which? has cautioned that the popular Lifetime ISA (LISA) will no longer accept new applicants from April 2028.
Key Changes to Lifetime ISA
The change, confirmed by HM Revenue & Customs under the Labour Party government, will see the LISA replaced with a new product exclusively for first-time buyers. This represents a significant shake-up in how people can save for both property and retirement.
Launched in 2017, the LISA allows savers aged 18 to 39 to contribute up to £4,000 per year and receive a 25% government bonus worth up to £1,000 annually. However, from April 2028, no new accounts can be opened, though existing accounts will continue under current rules.
Impact on Savers
This means anyone considering using a LISA for retirement must act before the deadline. The product has seen a dramatic rise in uptake, with account numbers nearly doubling from 706,000 in 2020-21 to 1.34 million in 2023-24, according to official figures. However, uncertainty remains over how many savers use it specifically for retirement, after some official data was withdrawn due to accuracy concerns.
Experts at Which? suggest the answer is not clear-cut. While the 25% bonus is appealing, workplace pensions frequently prove superior, particularly for employees receiving employer contributions. A Lifetime ISA might still be suitable if you are self-employed and lack employer pension contributions or have reached pension allowance limits. It can also be considered if you want a tax-free fund in addition to your pension.
Drawbacks and Penalties
However, there are drawbacks. Withdrawing money early for anything besides a first home incurs a 25% penalty, which can leave you with less than you initially contributed. There are increasing concerns that abolishing the LISA for retirement saving could impact freelancers most severely. Just one in five self-employed workers currently contributes to a pension, and industry experts caution the changes could leave them with fewer avenues to build long-term savings.
