The government has published consultation proposals to replace the Lifetime ISA with a new First Time Buyer ISA, removing the retirement savings component and withdrawal penalties that have attracted criticism since the product’s 2017 launch.
Under the proposed framework, savers would receive a government bonus only when funds are used towards purchasing a first home with a mortgage. The change would eliminate the penalty currently imposed on Lifetime ISA holders who withdraw money for purposes other than first-time property purchase or retirement.
Industry response
Financial services firms have responded positively to the consultation whilst cautioning that high property prices remain the primary barrier to homeownership. Rebecca William, financial planning divisional lead at Rathbones, said the Lifetime ISA “tried to serve two masters – helping people save for a home and for retirement – and in doing so it often created confusion rather than clarity.”
Williams noted that whilst a focused product should prove easier to understand, it comes at the expense of the Lifetime ISA’s tax-free withdrawal benefits from age 60, which contrasted with pensions where typically only 25% can be taken tax-free.
The firm warned that younger generations face a “double squeeze of high rents and elevated living costs”, making deposit accumulation increasingly difficult. Rathbones’ research indicates 60% of the sandwich generation expect to delay retirement due to financial pressures from supporting both children and ageing parents.
Property price cap concerns
Paula Higgins, CEO of HomeOwners Alliance, welcomed the removal of withdrawal penalties but expressed concern about the £450,000 property price cap, which has remained unchanged since 2017. “Those buying in the most expensive markets arguably need the most support, not a scheme that penalises them for purchasing an average-priced home in their area,” Higgins said.
The organisation’s research shows 1.9 million aspiring homeowners do not believe they will achieve homeownership like their parents, underlining the importance of effective first-time buyer support. This demographic shift mirrors broader trends among younger buyers navigating affordability challenges.
Higgins called for the Treasury to update the cap and ensure it rises in line with house prices rather than becoming outdated again.
Provider perspective
Skipton Building Society, which launched the first cash Lifetime ISA in 2017 and currently serves over 160,000 LISA savers, reported the product has helped over 314,000 first-time buyers secure property. Jasvinder Gakhal, chief executive officer at Money at Skipton Building Society, described the consultation as “a step in the right direction”.
The proposed changes include removing the withdrawal penalty, scrapping the upper age limit, and reviewing the price cap. Industry figures note that first-time buyers are purchasing later in life, with the traditional milestone of homeownership now drifting into the mid-thirties for many.
The consultation period remains open as the government seeks feedback on the proposed framework. The outcome could affect funding options for first-time buyers across different regional markets, particularly in areas where property prices have outpaced the current cap.
