Lifetime ISA to be replaced as John Healey makes major change to ‘unfair’ withdrawal penalty

Mr Healey said: “For every young person who is working hard, saving what they can, and dreaming of their first home, I’m taking action.

“I’m announcing that a First-Time Buyer ISA will replace the Lifetime ISA. From today, I’m dealing with the ISA penalty, so that if the home you want costs more than the limit, you will get back at least what you put in.”

Under existing Lifetime ISA rules, people can save up to £4,000 each tax year and receive a 25 per cent Government bonus worth up to £1,000.

The money can be used to buy a first home costing no more than £450,000 or accessed from the age of 60.

Savers who withdraw it for most other reasons face a 25 per cent charge.

Because that charge is applied to both the saver’s money and the Government bonus, it can take away part of the person’s original contribution.

For example, someone who pays in £4,000 receives a £1,000 bonus, bringing the balance to £5,000. A 25 per cent penalty would remove £1,250, leaving them with £3,750 and a £250 loss on the amount they deposited.

The Budget change means buyers whose chosen property exceeds the purchase-price cap should recover at least their original contributions rather than losing some of their own money.

The Government had already consulted on replacing the Lifetime ISA with a simpler account focused solely on helping people buy their first home.

Its consultation found that unauthorised withdrawal charges affected eight per cent of all Lifetime ISAs opened in 2024-25. It also said more account holders had lost part of their own savings through penalties than had used the product to purchase a home.

Plans published before the Budget proposed opening the new ISA to UK residents aged 18 and over, without the Lifetime ISA’s upper age limit of 39.

The Government bonus would be paid when the saver buys a qualifying home rather than being added to the account as they save. The proposed account would also be available in cash and investment versions and would need to be held for at least 12 months before a bonus could be claimed.However, the final annual contribution limit, Government bonus and maximum qualifying property price will need to be confirmed in the Budget documents.

Existing Lifetime ISA holders are not expected to lose their accounts. The Government previously said they would be able to continue saving under the current rules indefinitely, while new Lifetime ISAs could still be opened until the replacement becomes available.

Rachael Griffin, tax and financial planning expert at Quilter, welcomed the reduction in the Lifetime ISA withdrawal charge from 25 per cent to 20 per cent for first-time buyers purchasing homes above the £450,000 limit.

She said: “Removing the government bonus is one thing but eating into someone’s own savings is another.”

Ms Griffin also backed the creation of a First-Time Buyer ISA without an upper age limit or punitive withdrawal charge. However, she warned that retaining the £450,000 property cap could carry an existing problem into the new account as house prices rise.

She suggested that a lifetime limit on the Government bonus could offer a fairer way to control costs than a fixed property-price ceiling.

Ms Griffin also warned that savers could miss out if the new account pays the Government bonus only when they purchase a home. Under the Lifetime ISA, bonuses are added regularly and can earn interest or investment returns while the deposit grows.

She added: “Existing savers should be able to transfer into the new account without penalty where it better suits their needs, rather than having to navigate three generations of home-buying ISAs with different rules.”