Lifetime ISA reform: Retirement option could be scrapped in overhaul

Lifetime ISAs (LISA) are set for the biggest shake-up since their introduction in 2017, with the government set to consult on a “simpler” replacement ISA.

The product will be exclusively focused on first-time buyers, dropping the retirement saving option currently available, CityWire reports. The new ISA could launch in April 2028, according to the publication.

Under current rules, Brits can put up to £4,000 a year into a Lifetime ISA and the government adds 25%, up to a maximum of £1,000 per year. The £4,000 must be within the overall £20,000 annual ISA allowance. You can hold cash or stocks and shares in a LISA.

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You can then use the money to either contribute towards a down payment on a property worth up to £450,000, or save the money and withdraw it fee-free once you reach 60 years old.

If you withdraw money from your LISA for anything else, you have to pay a 25% exit penalty, unless you are terminally ill, with less than 12 months to live.

Under the proposed rules, the 25% bonus would reportedly be paid when an individual withdraws their cash to buy a property, rather than paid monthly. As the bonus would be paid at the point of purchase, it’s expected there wouldn’t be 25% exit penalties.

However, by not paying the bonus monthly, savers would not be able to make the most of compounding interest and investment returns on the government bonus. It could mean that future LISA-equivalent pots will be smaller over time compared to ones that benefit from the monthly payment system.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, told MoneyWeek that a potential removal of the retirement option was “disappointing as the LISA has the potential to be a gamechanger in helping groups such as the self-employed prepare for retirement”.

Chancellor Rachel Reeves said in her 2025 Autumn Budget that the government would launch a consultation on a “new, simpler ISA product to support first time buyers to buy a home” in “early” 2026.

A Treasury spokesman told MoneyWeek: “We recognise that the Lifetime ISA is not working for everyone, particularly when people's circumstances change. That is why we intend to consult on a new and improved product, specifically designed to support first-time buyers and without penalty for withdrawals.”

No word on property cap being scrapped

It is not currently known whether the £450,000 property price cap would be scrapped when the new ISA product launches.

This cap, which means savers have to pay a 25% penalty if they want to use their LISA to purchase a home just £1 over the limit, has been the subject of criticism by some who think it is not enough.

The average property in the UK cost £297,755 in December 2025, according to the Halifax House Price Index, meaning first-time buyers in most of the UK aren’t affected by the £450,000 limit.

However, those seeking to buy where house prices are typically more expensive, such as London, are much more pressed. The average price of a property in the capital is £539,086, almost £100,000 above the LISA cap.

With house prices this high, Londoners wanting to buy their first home with their Lifetime ISA bonus are much more restricted in which houses they can purchase.

Morrissey said: “The £450,000 limit for value of first homes bought with a LISA has been in place since the product was first introduced so there’s a strong argument that it needs to be increased given the house price inflation we’ve seen over that time.

“This needs to be addressed both in the consultation on what a new product would look like but also for the LISA as it currently stands. People are still using the LISA to help them get on the property ladder and it is vital that it remains fit for purpose for these people.”

In June 2025, the Treasury committee released a report that highlighted some problems with the current LISA regime. The report called the LISA “complex” and said it increases the risk of savers choosing “unsuitable investment strategies”.

The committee also criticised the confusion around the penalty incurred when LISA funds are withdrawn for something other than a house purchase under £450,000 or retirement.

They were less critical of the house price cap, however, saying that the current cap “ensures government spending supports those who need financial assistance the most”.